Why The Path To Rate Cuts Is Complex? - searchpartyproperty

Why The Path To Rate Cuts Is Complex?

You may have noticed that the narrative surrounding interest rates has begun to shift slightly.

For the first few months of this year, the overwhelming consensus was that we’d see some action on rate cuts within the latter half of 2024.

We even released an article back on the 11th of March, summarising and commenting upon the big four banks’ predictions for interest rates:

So, though there was some disagreement on the exact timing, all four banks were expecting a reduction this year.

Unfortunately, this sentiment has begun to dilute, with rising concerns that we may not see any movement until 2025.

From the above screenshot, you will note that ANZ previously was the most conservative with its forecast for interest rates – predicting the earliest rate cut to arrive no sooner than December.

In fact, at that time, ANZ boss Shayne Elliot also warned that he could foresee the impending stage 3 tax cuts as pushing a first rate cut back into 2025 – since those tax cuts will be equivalent to two rate cuts in terms of putting money back into people’s pockets.

However, with the RBA operating under an abundance of caution, there are several emerging factors that have the potential to upend the remaining consensus on rate cuts (on top of tax cuts):

  1. ‘Immaculate Disinflation’

This was covered in one of our earlier articles, but in short, the job market has been performing strangely, such that it may contribute further to a ‘wait and see’ approach from the RBA.

  1. Complicated Inflation Figures

We know that inflation figures are falling, but some commentators have suggested that there is more to the story.

Inflation among services remains particularly ‘sticky’, and rent inflation remains extraordinarily high:

Further rapid exacerbation of housing costs is a major concern, should rate cuts arrive prematurely.

  1. US Inflation Figures

Despite a similar monetary policy environment, inflation in the US has jumped over the past month due to strong employment numbers and an unexpectedly sharp rise in fuel and housing costs:

Whether or not Australia will follow suit with a similar inflation reversal is a key point of debate right now.

On the one hand, we know that Australians have uniquely suffered from rate rises, due to high debt levels and an extremely low number of fixed rate home loans:

But at the same time, it would be very foolish to expect complete isolation from economic conditions in the United States, given the dependent relationship many of our own banks have upon US financial institutions.

  1. Israel, Iran, and Oil Prices

Already, financial markets have felt the impact of a new conflict in the middle east. If the situation between Israel and Iran were to escalate into a regional war, we may see an effect similar to that of the Ukrainian conflict upon oil and energy markets.

A key concern is that war could significantly impede key shipping routes such as the Strait of Hormuz, between Iran and Oman, where roughly 20% of the world’s oil supply passes through.

In turn, this may threaten to push inflation higher at home, but it remains to be seen if Israel will choose to escalate the situation further, following Iran’s retaliatory strikes on the 14th of April.

So, what’s the verdict?

It’s important to note that for now, all of these concerns are still in the minority.

For what it’s worth, markets are still expecting cuts this year. It’s just that the outlook is becoming a bit cloudier:

Want to discuss this further?

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