Why the outlook for interest rates is so uncertain
Earlier in the year, many economists felt the Reserve Bank of Australia (RBA) might start reducing the cash rate from the third quarter of this year. Now, increasingly, those forecasts are being pushed back, with some economists believing the first cut won’t occur until 2025.
Inflation, which is currently at 3.6%, is the key. The RBA is trying to reduce inflation to its target range of 2-3%. The whole point of increasing the cash rate – and therefore home loan and business loan rates – was to reduce spending and thereby reduce inflation. Inflation has fallen significantly since peaking at 7.8% in December 2022, but is still too high for the RBA’s liking.
The latest data are giving conflicting signals. On the one hand, the economy has slowed markedly, growing just 0.1% in the March quarter. Less economic activity means less spending, which puts downward pressure on inflation. On the other hand, the unemployment rate has recently improved, falling from 4.1% in April to 4.0% in May. More people in work means more people have money to spend, which puts upward pressure on inflation.
That’s why no one can be certain what will happen with interest rates; indeed, it’s possible the RBA might increase rates further. So please budget accordingly.
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