As rates stayed firmly on hold throughout 2024, Bendigo Bank’s Chief Economist, David Robertson says a gradually but steadily improving domestic economy is likely in 2025.
Mr Robertson said Australians can expect rates to start easing in the early part of 2025 as inflation is tamed, forecasting:
• The RBA to deliver interest rate relief by May,
• The unemployment rate to edge higher, mildly,
• That trading 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.
“While there’s been a growing chorus of opinion encouraging earlier rate cuts and suggesting the RBA is unnecessarily holding rates too high, this view seems to overlook two crucial factors.”
“Firstly, the RBA were later than our peers in hiking rates back in 2022 and the RBA increased rates to a less restrictive level. A neutral cash rate in Australia (where we will likely return to next year) is estimated at 3½%, so we are less than 1% into restrictive territory, unlike other comparable economies.”
“Any earlier cuts to rates could have jeopardised the ongoing fight against inflation,” Mr Roberson said.
“Secondly, 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 29 and then April 30) should give the RBA the evidence it needs to cut in May.”
Mr Robertson also said the latest GDP data 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 1991-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,” Mr Robertson concluded.
Bendigo Bank’s Chief Economist, David Robertson. Photo & story credit: Bendigo Community Bank
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