When Will Interest Rates Fall? It May Be Later Than You Think
Key takeaways
The Reserve Bank of Australia (RBA) is unlikely to cut interest rates soon. While some initially expected a mid-2024 rate cut, revised forecasts suggest a more prolonged timeline, potentially seeing three rate cuts by 2025.
The RBA remains focused on controlling inflation, which is still above the target range of 2-3%. Despite easing inflation, it remains “sticky” in sectors like services, housing, and wages. The RBA is cautious about cutting rates too soon, fearing it could reignite inflation.
Australia’s labour market remains robust, with low unemployment and rising wages. This is delaying rate cuts as strong wage growth can fuel inflation. The RBA is monitoring the labour market for signs of cooling before considering any rate reductions.
Despite a fall in the inflation rate to 3.8%, it remains above the RBA’s comfort zone. Factors like strong demand, wage growth, and rising oil prices are keeping inflation elevated. This makes a rate cut in 2023 unlikely, with the RBA adopting a cautious approach going into 2024.
While the delay in rate cuts may seem challenging, the high-interest-rate environment could benefit seasoned property investors. Reduced competition and softened demand in certain areas may present strategic buying opportunities. Investors with a long-term outlook could capitalize on potential market growth when rate cuts eventually occur.
Many property investors and homeowners are eagerly awaiting the day when interest rates begin to fall, hoping it will ease the burden of higher mortgage repayments and boost the property market.
But if you’re expecting an imminent rate cut, you might want to reconsider your timeline.
It seems that we could be waiting longer than anticipated for relief from the Reserve Bank of Australia.
The Reserve Bank has provided strong forward guidance, suggesting it will not cut rates soon.
Governor Michele Bullock has emphasised that while the worst of inflation might be over, the central bank wants to avoid premature rate cuts that could undo its hard work in bringing inflation down.
The RBA has been clear that it is prepared to hold rates at higher levels for longer if that is necessary to bring inflation within its target range.
Many of the economists and market analysts who had initially predicted potential rate cuts by mid-2024 have now revised their expectations.
The “money market” which speculates on where interest rates are going, now says there’s only a one in three chance of a cut in December. They now see three cuts next year, taking the cash rate to 3.7% by December 2025.
Similarly, three of our four big banks expect the first rate cut early next year
Let’s explore 3 reasons why interest rates might not drop as soon as we’d like…
1. The RBA’s reluctance to rush
The Reserve Bank of Australia has been consistent in its message: inflation control is its top priority, even at the cost of short-term economic pain.
Inflation in Australia is still hovering above the RBA’s target range of 2-3%, and the central bank has signalled that it won’t move to lower rates until it is confident that inflation is under control.
While inflation has eased from its peak, it remains sticky in some sectors, particularly in services, housing, and wages.
As a result, domestic pressures are keeping inflation higher for longer, despite global inflation starting to cool.
The RBA knows that cutting rates too soon could reignite inflationary pressures, which would be counterproductive.
This means that economists and market analysts who had initially predicted potential rate cuts by mid-2024 are now revising their expectations.
The “money market” which speculates on where interest rates are going, now says there’s only a one in three chance of a cut in December. They now see three cuts next year taking the cash rate to 3.7% by December 2025.
2. Unemployment’s role in rate decisions
The latest jobless figures have now made an interest rate cut this year less likely.
Over 64,000 people found jobs in September, keeping the jobless rate unchanged at a revised down 4.1 per cent last month. However, the participation rate—the share of working-age people either with a job or looking for one—hit a record high of 67.2 per cent.
A strong labour market is another factor delaying rate cuts. Australia’s unemployment rate is still low, and job vacancies remain high, which has been driving wage growth.
Higher wages are usually a positive economic sign, but they can also lead to more spending, which in turn fuels inflation.
If wages continue to grow at current rates, the RBA will need to remain cautious about cutting rates too soon, as it risks adding to inflationary pressures.
The RBA is watching for signs that the labour market is cooling. However, if the employment rate stays robust and wage growth remains strong, it may be difficult to justify a rate cut in the short term.
3. Persistent inflation
We’ve heard a lot of talk about inflation remaining stubbornly high, and the official Aussie inflation rate is 3.8 per cent – still well above the RBA’s target band of 2-3 per cent.
While the inflation rate is falling, solid wages growth, strong demand and a mini-surge in oil prices are likely to keep inflation higher than the RBA wants.
What about a rate cut this year?
The general consensus is that it’s highly unlikely that we’ll have a rate cut this side of Christmas.
Inflation data continues to show stubbornness, and the RBA seems more focused on ensuring long-term price stability than offering short-term relief for mortgage holders.
Even with moderating inflation and cooling housing prices, it’s clear that any move to cut rates in 2024 would be premature.
Instead, the RBA may adopt a “wait-and-see” approach well into 2024, watching closely for signs that inflation is definitively under control before considering easing.
What does this mean for property investors?
This isn’t necessarily bad news. The current high-interest-rate environment can also present opportunities.
Those who can afford to invest now may benefit from less competition and lower prices, particularly in areas where demand has softened.
If you’re a seasoned investor with a long-term view, this countercyclical period could be a good time to strategically enter the market, anticipating that rate cuts — when they do come — could reignite price growth.
