RBA August Prediction: Interest Rate Drops Still Beyond the Horizon

The short of it: inflation rose in the June quarter, but the RBA’s main focus (underlying inflation) felI. What does this mean? Previous calls for rate hikes should fall by the wayside. In fact, leading economists at CBA and Westpac have predicted that the RBA could even use the November board meeting to introduce a rate cut, which would be the first good news for homeowners since rates began to increase in March of 2022. Let’s get into it.

Will the cash rate hold?

The RBA has so far avoided hiking the cash rate too high, by holding rates over an extended period. This has resulted in slower economic growth and an easing labour market but inflation is yet to fall to their preferred range of 2-3%. This has left some commentators worried that the RBA would hike rates further.

Fortunately, as the latest data flows in from the Australian Bureau of Statistics (ABS) it seems that inflation is travelling as expected – the Consumer Price Index (CPI) rose 1.0% in the June quarter and 3.8% annually – suggesting that inflation is, if not where we want it, at least shifting down. Globally, disinflation has continued and locally, Australia continues to weather the economic post-pandemic challenges.

Most commentators are therefore forecasting that the cash rate will remain at 4.35% when the RBA meets next week. Once again this includes the 4 major banks with Westpac, NAB, CBA and ANZ sticking to their previous projections – the cash rate will continue to hold through most of 2024.

Leading economist and Property Insights contributor, Stephen Koukoulas, has argued that the news could spell the potential for a rate cut as early as next week:

“The inflation numbers hopefully should embarrass those that are calling for multiple rate hikes over the period ahead because we are going to be getting multiple rate cuts over the period ahead,” Koukoulas told YahooFinance.

Inflation is “pretty much under control” but the RBA will likely continue their steady approach.

With the June quarter data showing inflation continues to shift downwards, those of us watching closely might hope it’s enough to encourage the RBA to take rate hikes off the table but there’s still enough uncertainty to have commentators debating.

Is a rate hike really a possibility?

July saw a 22% market expectation that interest rates will increase to 4.60% at the upcoming RBA Board meeting.

Why? Well, globally high interest rates play a part but a lot of concern stemmed from the fact that the RBA’s June Minutes clearly stated the possibility of a rate hike if inflation stays too high. With this in mind, analysts were watching for any shift that might force the RBA to consider a rate increase at the August meeting – such as the CPI approaching 4.1% this quarter.

As we’ve seen, however, inflation is definitely continuing its overarching decrease. As Westpac Groups Chief Economist pointed out recently ‘sticky inflation need not imply stuck inflation.’ And if inflation is shifting, a rate hike becomes less necessary.

When Mark Bouris was asked about the possibility of rates rising recently, he saw no reason for it, “My gut feeling right now, and our analysis, shows that the Reserve Bank will not put up rates because by putting up rates they will not control things.. there is no effect.”

It seems likely the RBA will stick to its original strategy – hold the cash rate until it is confident inflation is locked in towards target, then begin cutting to head towards neutral.

Will rates drop anytime soon?

When rates first hiked, Economists speculated that the cash rate would start dropping towards the end of 2024. The slow progress of Australia’s disinflation, however, may have the RBA keeping rates on hold for longer – some commentators are even predicting well into 2025.

One of the Big 4 Banks, NAB, has shifted its predicted rate drop to May 2025 with an expected decrease by a steady one cut per quarter until rates reach 3.1% by mid-2026.

Economist Stephen Koykoulas, recently broke down Australia’s current position during his regular economic review with Mark Bouris on Property Insights. As his analysis shows, we would probably need to see another quarter or two of a 0.6 or 0.7 inflation rate before the RBA might look to rate cuts. ‘I think there’s a very high probability they do nothing in August.’

Mark Bouris agrees economic analysis should look to a more long term but otherwise unchanged prediction of cash rate holds and gradual decreases into 2026. ‘I think we are definitely not looking at interest rate reductions until sometime in the middle of next year.’

Keep holding on

Those with variable rates or looking to take on a new loan will continue to be left somewhat uncertain about interest rates.

If the long wait for interest rate relief is taking its toll, Mark Bouris encourages Australian’s to take active steps to ensure financial stability, rather than assume that nothing can be done.

What can you do? Well, try looking into some of the following options.

• Consider refinancing or fixing your home loan 
• Look at changing from principal interest to interest only for a period of time
• Consider asking for relief or hardship assistance – perhaps a 3-month period
• Seek professional advice – don’t risk your home