Will Interest Rates Go Down In 2024?

The Reserve Bank has cited Australia’s persistently high inflation as the number-one reason behind its repeated interest rate increases that may yet tilt the economy into a recession.

The consumer price index (CPI) peaked at 7.8% in December 2022, and despite the force of the numerous interest rate hikes by the central bank, has been slow to wind down. Inflation continued to be hotter-than-expected at 5.4% in the September quarter and a stubborn 3.6% in March. That is still some way off from the RBA’s targeted band of 2% to 3% inflation.

The sluggish pace of decline last year forced the central bank to resume rate hikes in November after a four-month pause, taking its cash rate to a 12-year high of 4.35%. However, the RBA voted to hold the cash rate steady at its most recent meeting in May.

Like its counterparts across the world, the RBA is wary of inflation expectations becoming entrenched, which would require much higher interest rates and much higher levels of unemployment to reduce. 

High inflation tends to distort the economy because it results in people putting off a lot of economic activity to protect themselves from it, resulting in a waste of economic resources. It can also adversely affect productivity, reduce the value of savings, hurt household budgets, and make it harder for businesses to plan and invest.

Could interest rates go even higher? Most economists, and even the RBA, are not really sure. They say the answer would be determined by economic data and the evolving risks for the economy.

After the March inflation data, AMP deputy chief economist, Diana Mousina, told the ABC that the higher-than-expected CPI figure has “effectively ruled out rate cuts in the coming months”.

“This inflation data will certainly renew some of that debate around whether we actually need to see higher interest rates,” Mousina said.

“We don’t think we will see a further rate hike from here, I just don’t think it’s necessary, but the quarterly inflation data does mean that the risk of a near-term rate cut has absolutely disappeared.”

Callam Pickering, Asia-Pacific economist at jobs listing site Indeed, told Forbes Advisor that further rate hikes are certainly possible: depending on whether service sector inflation (housing, transport, restaurant, travel, etc.)  shows meaningful signs of moderation.

Meanwhile, ANZ Bank senior economist, Adelaide Timbrell, says while it’s possible rates may rise, recent data including the higher unemployment rate in November means the chance of another rate hike is less likely.  

“Our central scenario is that the Reserve Bank is done and will not need to lift rates further,” she said. 

“But if there are surprises on the upside for inflation versus the RBA’s own inflation path, or if the risks grow for inflation to not reach the target (band) by the end of 2025, that could change the bank’s most likely move to a further hike,” she warned.

One economist who is bullish on the prospect of rate hikes is Judo Bank chief economic adviser, Warren Hogan. Hogan, it should be pointed out, correctly predicted last year’s forecasts, anticipating the RBA would raise the cash rate five times to 4.35%.

RBA Governor Michele Bullock has acknowledged that two years of rate hikes has been devastating to some Australians.

“…There are households really struggling to make ends meet,” she said at a press conference after the Board voted to hold the cash rate steady in May.

“These people don’t have a lot of extra savings, they might be working a second job, cutting back on discretionary items or making difficult decisions such as putting off medical appointments. These people are doing it tough and the Board and I are very conscious of that.”

The central bank’s 13 interest rate increases since May 2022 have resulted in some households entering mortgage stress territory. According to the latest retail figures, household spending increased 4% for non-discretionary in the March quarter, but crucially decreased 0.1% for discretionary spending. Despite population growth, overall GDP per capita shrunk by .5%

“At the current cash rate, things will be challenging for Australian households in 2024 and household consumption is the biggest downside risk for the Australian economy next year,” Pickering warns. 

ANZ’s Timbrell also expected things to get worse in the short term, before the situation returns to normal.

“Households in particular will see consumption fall in the near term, before regaining as lower inflation and the end of rate rises helps real household incomes adjust upward,” she says.

While there is renewed talk of another rate hike, some market watchers are still betting on the possibility of rate cuts later this year.

Pickering says this discussion is likely to be driven by concerns around falling household spending, but would still require solid evidence for the RBA to be convinced that inflation is heading back to its 2% to 3% target band.

“For rate cuts, we’d need to see inflation under-shoot, or a growing belief that the economic outlook is perilous,” he said. “My view is the household sector represents a considerable downside risk to the economic outlook and will trigger increased discussion about rate cuts during the second half of (this) year.”

ANZ’s Timbrell says specific factors that the central bank would need to consider to embark on rate cuts would be a convincing slowdown of inflation, where getting comfortably in the target band in 2025 looks likely, and also enough cooling in the labour market. 

“So more unemployment and less inflation, which shows that the economy has cooled sufficiently to allow an unwinding of restrictive policy,” she said.

Influence of US Federal Reserve on Rates

Last last year, the US Federal Reserve signalled the end of US monetary policy tightening and said lower borrowing costs were likely. However, inflation has come in higher-than-expected at the last three meetings, with the CPI at 3.5% for the year to March. The US Federal Reserve has only raised rates once at its past eight meetings. 

Pickering says the RBA closely watches global developments and if the Federal Reserve or ECB were forced to ease, that could impact its thinking. But the actual decision to cut rates would be driven primarily by domestic factors. 

“Merely normalising monetary policy abroad would not be enough to trigger a shift in RBA thinking and, in fact, the RBA may even welcome that given the likely impact it would have on the Australian dollar,” he said.  

Timbrell agrees with that view, saying the Fed’s potential easing could make it easier for the Reserve Bank to start cutting rates in late 2024, but these short-term developments will pale in comparison to the impact of homegrown factors on Australia’s interest rate trajectory. 

“A lot of our inflation problem, and a lot of the issues that the RBA are looking at now, are more domestic. Apart from wage growth, the Australian labour market and how much Australian households are spending, the financial stability of the Australian household sector and of course, Australian inflation,” she said. 

When interest rates do start to come down, economists are convinced the decline will be gradual and nowhere close to the lows seen prior to May 2022. What they are unable to agree on, though, is the extent of the possible rate cuts later this year or early next year.

Indeed’s Pickering expects increased chatter around easing will emerge over the second half of this year as households continue to struggle. ANZ’s Timbrell is expecting rates to remain largely stable at the current 4.35% through 2024, followed by a single 25 basis points rate cut in the fourth quarter.