On Thursday, the big bank announced it had pushed back the planned start of the rate cut cycle from February to May. The adjustment follows recent minutes from the Reserve Bank, which indicated the balance of probabilities had shifted.
“RBA board meeting minutes often provide important color to the board’s deliberations, going beyond what is already covered in communications immediately following the meeting,” said Luci Ellis, economist chief of Westpac.
“Although post-meeting communication was still broadly consistent with our initial expectations, subsequent public appearances and minutes now suggest that the balance of probabilities has shifted. »
Ellis pointed to the recent uptick in consumer confidence and the ongoing resilience of the job market as key factors that likely delayed the start of rate cuts.
According to Ellis, Westpac now expects the first reductions to be implemented from the start, with back-to-back reductions in late May and early July. The bank expects the final rate to reach 3.35 percent by the end of 2025.
However, Ellis acknowledged that an earlier start, in February or March, remains a possibility, although it is “no more likely than a May start date.”
“A later start date is also a risk scenario, if inflation does not fall as the RBA currently projects, not to mention our own slightly more dovish expectations. That said, the longer the RBA board waits, the quicker it will have to act afterwards because it is then more likely that it has hesitated too long,” she said.
Ellis also noted signals from the central bank’s communication that it is “more comfortable” with a later start priced into the market. Current market expectations predict a first rate cut in August next year.
Earlier this month, RBA Governor Michele Bullock noted that while market expectations for a gradual easing of monetary policy from mid-2025 do not match the bank’s official forecasts, they faithfully reflect his perspectives.
“We are not, at the moment, in a position where we can sustainably say that inflation will return to a high level. [target] group, and we want to be more convinced of that,” Bullock said.
“I think what the market is reflecting is that it understands that view and that the risks are balanced.”
Additionally, Ellis raised concerns about the RBA’s inflation forecasts on Thursday, suggesting its assumption that consumption growth accelerates as inflation falls is too optimistic. She also questioned whether the RBA’s assessment of full employment was too hawkish.
Earlier this month, NAB became the first major bank to push back its rate cut forecast until May 2025.
Following the unemployment figures – which revealed a steady rate of 4.1 per cent in October with employment moderated at 16,000 – the NAB said May was a more likely scenario for the start of the rate cut cycle.
“Inflation data shows some persistent pressure on components sensitive to domestic demand and labor costs,” the bank said at the time.
“Combined with the resilience evident in recent labor market data, we believe the RBA should be concerned about a further weakening of the labor market in deciding to cut spending as early as February, with May being more likely.”
ABC uncertain but sticks to initial forecasts
Earlier this week, the CBA said the RBA minutes left the bank “uncertain” about the central bank’s “response function to begin the cash rate normalization process”.
Despite this, the CBA said it would stick to its base case scenario of an initial interest rate cut of 25 basis points in February 2025.
“The December 2024 board meeting is not ‘live.’ As such, the risk to our decision clearly lies in a later start to the easing cycle,” said Gareth Aird, head of Australian economics at the bank.
“In particular, we think the RBA will be more willing to leave policy on hold for an extended period if the unemployment rate has not risen much over the next three to six months,” Aird said.
Despite uncertainty over the timing of the first interest rate cut, the CBA base case for the cash interest rate calls for an easing of 100 basis points during 2025, bringing the rate year-end cash at 3.35 percent.
Aird explained that fiscal policy is the main source of uncertainty, especially as the federal election is likely to take place in May next year.
“Easing fiscal policy would result in less easing of monetary policy, all else being equal,” he said.
