RBA December Decision: Holding Steady at 4.35%

January 12, 2024

The Reserve Bank of Australia (RBA) announced the retention of the cash rate at 4.35% following its December meeting. This decision aligned with expectations, considering the mixed data on economic activity and positive trends in inflation, which is on a downward trajectory. The RBA acknowledged that the full impact of previous rate hikes is yet to be fully realised, leading to a straightforward decision to maintain the current cash rate.

Statement and Interest Rate Outlook

The RBA’s statement remained consistent with previous communications, indicating a potential increase in interest rates in the next 3-6 months. This forecast aligns with financial market predictions, which also anticipate rate hikes later than in comparable economies. The Australian cash rate is notably lower, reflecting these expectations.

Key Drivers of Interest Rate Outlook

1. Inflation Trends – Current inflation rates hover around 3-4%, with various indicators pointing towards moderating price growth. Despite high consumer inflation expectations, the RBA aims to bring inflation back to the 2-3% target band by the end of 2025.
2. Jobs Market – The health of the job market, influenced by global economic trends, will play a crucial role in shaping the interest rate outlook.
3. Global Cash Rate Movements – The trajectory of global interest rates, particularly in developed economies, will impact Australia’s interest rate decisions.

Financial Market Perspectives

Financial markets have priced in the possibility of a rate hike in the first half of next year due to current inflation rates. By the end of the next year, a potential rate cut is anticipated, influenced by global rate movements and domestic economic factors like household disposable income growth and government policies.

Jobs Market and Global Economic Trends

The evolution of the jobs market is a critical factor, with global economic shocks like the pandemic and geopolitical events influencing the cash rate cycles. The aggressiveness of global central banks in implementing rate cuts is a point of contention, with some speculation of rate reductions as early as next year.

Long-Term Interest Rate Projections

Economists predict the cash rate to range between 2.6% and 3.85% by the end of 2025. Financial markets currently estimate higher rates for Australia and New Zealand, reflecting domestic economic conditions like housing prices and population growth.

Historical Context and Future Projections

Historical trends suggest that the cash rate is unlikely to return to the high levels of the 1980s and 1990s. The 2000s saw higher rates due to global borrowing and a mining boom, while the 2010s were marked by lower rates due to global economic challenges. The current decade is expected to have a higher average rate than the 2010s but lower than the 2000s, driven by significant investment spending.

Bottom Line: Cash Rate Outlook

The expectation is that the cash rate has peaked, with inflation decline and unemployment rate changes influencing future decisions. Rate cuts in Australia are not anticipated until early 2025, aligning with the inflation target. The cash rate is expected to remain stable at its peak for a more extended period compared to other countries.