Last week, the Reserve Bank of Australia (RBA) held its latest cash rate and elected to keep rates on hold at 4.35%. It stated:
Inflation has fallen substantially since its peak in 2022, as higher interest rates have been working to bring aggregate demand and supply closer towards balance. But inflation is still some way above the midpoint of the 2–3 per cent target range.
However, the following day, the Australian Bureau of Statistics released monthly inflation data, which revealed that inflation has fallen to 2.75%.
This sparked hopes that the central bank may now be in a position to give homeowners a boost by cutting interest rates.
But is that actually the case? Let's see what the economics team at Westpac Banking Corp (ASX: WBC) is saying about interest rates.
Where are interest rates going?
Unfortunately, Westpac's chief economist, Luci Ellis, doesn't believe last week's inflation reading has changed anything.
In fact, she notes that the RBA was anticipating such a reading. Ellis said:
In the media conference, Governor Bullock also acknowledged that headline inflation would print below 3% the next day. But the Board wants to see inflation sustainably in the 2–3% target range, not just temporarily.
Ellis points out that the lower inflation reflects temporary measures which will likely reverse in time. She adds:
But because much of this decline reflects temporary measures such as the electricity rebates and other cost-of-living measures, this is not enough to keep inflation in target. That said, it will have a welcome effect on people's inflation expectations, as will the recent decline in petrol and other prices that have been shown to be salient in forming those expectations.
Rate cut prediction
Westpac's chief economist continues to believe that the RBA will make its first cut to interest rates (to 4.1%) in February next year. Ellis explains:
Based on the Board's statement and media conference, we do not see any reason to change our current view, that the RBA will remain on hold this year and start lowering the cash rate from February. There are uncertainties around this if events should turn out very differently than expected. Overall, though, we see the RBA Board as a bit more firmly on hold than last month.
After which, she is forecasting the cash rate to be 3.85% by June 2025, 3.6% by September 2025, and 3.35% by December 2025. It is then expected to remain that way until at least December 2026.
