Markets say cut. RBA says how far?
The question of whether we'll get rate cuts this year seems to be settled. Every economist in the country is expecting the next move to be down.
The question then becomes when are we going to see the first rate cuts, and how many rate cuts are we going to get?
If I had to guess I would say May or June and three or four.
AMP chief economist, Shane Oliver lays out the reasoning, and essentially it all comes down to falling inflation, both here in Australia and around the world:
“Inflation across major countries has fallen sharply from peaks of 8 to 11% last year to around 3 to 5%. Australia lagged on the way up and is doing the same on the way down, but it’s falling too.”
“Inflation has eased sharply to around 3% in major industrial countries and around 5% in Australia and is likely to continue to fall as: supply chain pressures have reversed; demand is cooling; and labour markets are easing with sharp falls in job vacancies”.
“This includes in Australia which lagged US inflation on the way up and is just doing so again on the way down with our Inflation Indicator pointing to a further sharp fall”, Oliver adds.
“We expect central banks in the US, Canada and Europe to start cutting rates in March or the June quarter”.
“While there is still a high risk of one more hike in Australia in February, falling inflation should head this off so our base case is that the RBA has peaked ahead of rate cuts starting mid-year, taking the cash rate down to 3.6% by year end.”
You have to think that is very unlikely that inflation in Australia doesn't fall quickly going forward.
And that's the cause the inflationary pressures we saw during Covid we're a global phenomenon, as supply chains all over the place seized up.
But with those supply chains freeing up again, inflation is coming down everywhere:
And with that markets around the world are starting to price in rate cuts. I mean, in America. US Fed fund futures are pricing in a full seven rate cuts over the next year!
I don't think the US will get quite that many. But still it shows you that the expectation is for rates to fall and fall quickly.
Same story in Australia. Markets are currently pricing in two rate cuts in the second half of the year.
That could easily be 3 or 4 if inflation continues to fall as quickly as it has been.
Now, what happens to property prices if we get 100bps of rate cuts this year?
More on that next time.
JG.
Linda says
And the answer is?!