The last RBA meeting for 2024 went to script, but a wide range of opinions are still evident for the timing of the likely easing cycle ahead. A summary of the year behind us, and our suggestions for the year ahead.
As expected, the RBA cash rate is still at 4.35% after the December policy decision, meaning it remained unchanged throughout 2024, which we forecast at the start of, and throughout the year, so it’s pleasing to have prepared our customers and partners with that reality early in the piece.
Through the year, the market and consensus went through a rollercoaster ride of initially pricing in at least one rate cut in late ’24, to in July, actually pricing in a hike; but the market finishes the year back to the expectation of 3 cuts next year, aligning with our view.
There’s been a growing chorus of opinions encouraging earlier rate cuts and suggesting the RBA is unnecessarily holding rates too high, however this view seems to overlook two crucial factors: firstly that the RBA were later than our peers in hiking rates back in 2022 and did so to a less restrictive level, a neutral cash rate in Australia (where we will likely return to next year) is estimated at 3 ½ %, so we are less than one percent into restrictive territory, unlike other comparable economies.
Those advocating for earlier cuts to help with cost-of-living pressures also ignore the root cause of the cost-of-living shock, which is inflation itself: so any sustainable solution to these pressures lies in thoroughly taming inflation.
Nevertheless, we are getting closer to winning the war on prices with core inflation down to 3.5 %, and the next two quarterly reads (on January 29thand then April 30th) should give the RBA the evidence it needs to cut by May; and the latest GDP data also confirms that restrictive interest rates are reigning in demand. GDP growth in the third quarter picked up marginally from 0.2 to 0.3 % (and is at least still growing) but we remain in a per-capita recession and annualised growth is only 0.8 %, its slowest pace since the 91-recession outside the pandemic.
The fact that growth is so slow and only being propped up by public spending and population growth isn’t in itself a reason to cut rates now, but it is a reminder that monetary policy is doing its job and that rate cuts next year can help the private sector to recover, taking the reins from government spending.
Our forecasts for a gradually improving domestic economy in 2025 make a number of assumptions:
• That household disposable income will benefit from tax cuts, from moderating inflation and eventually from rate cuts;
• That underlying inflation will continue to moderate (together with a mild uptick in unemployment) allowing the RBA to cut rates by May, and
• That global conditions and geopolitical tensions will remain tense and potentially even more volatile as US tariffs are imposed, but Australia should be less impacted than almost anywhere.
We run a trade deficit with the US, with around 5% of our exports (mainly beef, gold and pharmaceuticals) potentially subject to tariffs, so the transmission mechanism for global trade and tariffs will probably be via China: and earlier this week Chinese authorities surprised the market with another round of broad stimulus measures. Chinese data (including exports) has in general surprised on the upside over the last month,
with some evidence of accelerating shipments ahead of the proposed 60% tariff, and as the chart shows, the 2018 trade wars did little to slow China’s share of global goods exports.
Tariffs have the largest impact on the country that imposes them, so the timing and sequencing of these policies will be critical to monitor next year for the US economy. As for China’s policy response and their fiscal expansion there are questions as to how sustainable this approach is, but it buys time for 2025.
In summary, next year should finally see conditions that allow the RBA to deliver interest rate relief by May, and while the unemployment rate will probably edge higher total employment is likely to remain near record highs. Geopolitics and financial market volatility (especially for stocks and exchange rates) will be as tough as ever to predict, but Australia may be more insulated than most from these tail risks.
And that’s the market update from Bendigo Bank, with best wishes for a safe and peaceful holiday season.
