Last week, the Reserve Bank of Australia (RBA) shocked the market (and homeowners) by electing not to cut interest rates.
The central bank revealed that it wanted to wait and see if inflation truly was under control before making a further cut to the cash rate. It explained:
With the cash rate 50 basis points lower than five months ago and wider economic conditions evolving broadly as expected, the Board judged that it could wait for a little more information to confirm that inflation remains on track to reach 2.5 per cent on a sustainable basis.
It also highlighted that trade tariffs were partly to blame for its decision to sit tight. Governor Michele Bullock added:
Uncertainty in the world economy remains elevated. While the final scope of US tariffs and policy responses in other countries remains unknown, financial market prices have rebounded with an expectation that the most extreme outcomes are likely to be avoided. Trade policy developments are nevertheless still expected to have an adverse effect on global economic activity, and there remains a risk that households and firms delay expenditure pending greater clarity on the outlook.
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When will interest rates fall?
The good news is that the economics team at Westpac Banking Corp (ASX: WBC) believes it won't be long until borrowers are given more relief.
Commenting on last week's decision to keep the cash rate on hold at 3.85% and its expectations for August, Westpac's chief economist, Luci Ellis, said:
The RBA Monetary Policy Board has defied market pricing and the great majority of private sector economists' views (including ours) by opting to keep the cash rate on hold at 3.85%. As we noted when we moved the expected August cut to the July meeting, cutting this month was not the 'shoo-in' that markets expected. The RBA has been a reluctant rate-cutter in recent months, especially earlier in the year. Still, the decision to hold is surprising, and the 6–3 split vote shows how finely balanced the decision was. Given the lack of consensus on the Board, the low information content of the post-meeting statement was not that surprising; this was the text a split Board could agree upon.
We reinstate the timing of the next cut to August. We also retain the spread-out timing (November, February, May) of subsequent cuts as being in line with the cautious approach the RBA has flagged. There is a (small) risk that even August is too soon for the RBA, if the CPI surprises on the upside. Our own current nowcast for June quarter is marginally above what their May SMP forecasts seem to imply. The Governor also mentioned that the data might come in slightly above their forecasts.
Looking further ahead, Westpac continues to forecast the cash rate falling to 3.35% by the end of the year and then ultimately 2.85% in 2026.
