Rate cuts may come sooner than expected: Bullock

Speaking during the House of Representatives standing committee last week (9 February), Ms Bullock stated the board may consider removing the restrictive nature of monetary policy if it remains confident that the target band will still be achieved.

“If we think monetary policy’s restrictive now, which we think it is, there’s a question [that comes about] when do we reduce restrictiveness back to neutral, and do we have to be in the band at 2.5 per cent before we think about doing that?” Ms Bullock said.

Ms Bullock further stated the RBA’s forecast has inflation returning to 3 per cent in 2025 and should reach the midpoint of 2.5 per cent in 2026.

Encouraging signs aside, the RBA governor stressed that bringing inflation down is still a major challenge for the Australian economy.

She added that an inflation rate “with a ‘4’ in front of it” is still not sufficient and some way from the midpoint of the board’s target.

“Given this, the board held the cash rate target at 4.35 per cent at its meeting earlier this week,” she said.

Following the February meeting, Ms Bullock raised eyebrows by stating that the RBA still hasn’t ruled out any further increases to the cash rate. However, she also stated that it hasn’t been ruled in either.

In her opening address to the standing committee, Ms Bullock said that the RBA’s forecasts for the cash rate are conditioned on “the assumption that inflation expectations remain anchored around the midpoint of the target range”.

“Furthermore, these are our central forecasts and there remains a great deal of uncertainty around inflation outcomes that far out,” Ms Bullock said.

“Even if the economy evolves along the central path, inflation will still have been outside the target range for four years.”

When are rate cuts expected?

Bank economists and commentators alike have already pencilled in when they believe the RBA will begin lowering rates.

The general consensus – especially among the major bank economists – is that rate cuts will begin in the second half of the year, however, some believe that it may come sooner.

Speaking to The Adviser, Vincent Woodgate, managing director of Woodgate Finance, said he expects to see inflation return to the low 3 per cent range by mid-2024, followed by a reduction in interest rates by “early June/July”.

However, chief executive of Home Loan Experts, Alan Hemmings, told The Adviser he is hesitant to believe that the RBA will cut rates by the end of the year.

“Although inflation continues to fall, it is still above the 2–3 per cent band the RBA likes. We also still have inflationary pressures, including migration and the proposed tax cuts in July that will put more money in people’s pockets,” he said.

“Adding to this, the RBA will be nervous about cutting rates too quickly and heating up the property market. Although cost of living is having an impact on everyone, we still saw an increase in property prices during 2023.”

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