Bendigo Bank’s March Economic Update
While central banks are gearing up for rate cuts in Europe and the US, closer to home the Reserve Bank of Australia (RBA) is maintaining its tightening bias according to Bendigo Bank Chief Economist, David Robertson.
In his latest forecast for interest rates, financial markets, and the domestic economy, Mr Robertson predicts Australian homeowners won’t see rate cuts until at least September, but more likely not until 2025.
“Ultimately RBA rate cuts will depend on core inflation returning to or below 3%, and while the latest Monthly Indicator showed CPI down to 3.4%, the core measure was still up at 3.8% in January, which is exactly where we have forecast it will land in the next quarterly numbers out in late April,” Mr Robertson said.
“The RBA’s preferred measure of core inflation, the Trimmed Mean, was 4.2% at the end of 2023 and should continue to ease, but while a fall to 3.8% may see the RBA remove its tightening bias in the May meeting, it won’t be enough for cuts until September at the earliest.
“A sharper increase in the unemployment rate could justify this timing if labour markets were to weaken markedly, but it will be difficult for the RBA to provide monetary policy support at the same time as tax cuts and soon after the fiscal stimulus expected in the May budget - so a spring RBA cut risks only being able to deliver one or two rate reductions, while waiting for our preferred scenario of February 2025 should enable five cuts down to 3.1%.
“The latest GDP data showed as forecast only 0.2% growth for the last quarter of 2023, meaning the Australian economy grew by 1.5% last year, but we remained in a per capita recession as the population grew by around 2.5%.
“Government spending and private investment prevented the economy from contracting, while household spending remained weak and dwelling investment is yet to pick up.
“While households remain under pressure with more falls seen in discretionary spending, household savings recovered a little, and disposable income also rebounded in the last quarter of 2023.
“As for the consequences of this GDP data for the Reserve Bank, it’s unlikely to convince them to remove their tightening bias in the March meeting, with house prices continuing to rise, fiscal stimulus on its way and unit labour costs still up 6.6% year-on year,” Mr Robertson said.
Mr Robertson said progress being made on the fight against inflation in overseas markets was encouraging.
“Elsewhere progress on inflation is promising with the US Core PCE down to 2.8% year-on-year, suggesting the Federal Reserve will be cutting rates by June, and similarly for the European Central Bank.”
“While other advanced economy central banks are likely to declare the war on inflation has been won, and start to cut rates mid-year, there will be increasing calls for the RBA to do the same. However, it’s important to keep in mind that we were around six months behind in the initial tightening cycle, and didn’t hike as aggressively,” Mr Robertson said.
“And lastly, asset prices remain at record highs for stocks and property, with markets continuing to bank on expected rate cuts and the hope of a soft landing in the US. The US yield curve remains inverted, so a soft landing is a big assumption, but for the Australian dollar, while the strong US Dollar is likely to keep the Aussie around 65 to 67 cents for some months, we expect some relative strength emerging in the second half as the Fed eases rates while the RBA sit tight, potentially seeing a move above 70 cents,” Mr Robertson concluded.
Watch David Robertson’s March Economic Update.
