"Monetary policy remains restrictive through 2024 and 2025"
The Commonwealth Bank of Australia now foresees only a single 25-basis-point cut in the cash rate by the Reserve Bank of Australia (RBA) this year, compared to the 75 basis points it previously expected.
“Our updated profile has one 25bp interest rate cut in 2024 that would deliver an end-year cash rate of 4.10%,” said Gareth Aird (pictured), Commonwealth Bank’s head of Australian economics. “We now look for 100bp of easing in 2025 and have pencilled in one 25bp rate cut in each quarter over 2025.
“Such an outcome would see the end-2025 cash rate at 3.10% (compared with our previous call of 2.85%). Given our estimate of the neutral cash rate, monetary policy remains restrictive through 2024 and 2025 on our forecast profile.”
Commonwealth Bank has modified not only its projections concerning the size of the anticipated rate cut but also the expected timeline for these interest rate reductions by the central bank.
The bank now anticipates that the RBA will start reducing rates in November 2024, a shift from its earlier prediction of September 2024.
The revision follows a stronger-than-expected Australian consumer price index for the first quarter of 2024, prompting concerns about near-term inflationary pressures that could lead to a potential interest rate hike.
“The near-term risk sits with an interest rate hike,” Aird said. “But we expect the RBA to be on hold over the next six months given the economy is still contracting on a per capita basis, inflation is forecast to fall further, and the labour market is anticipated to loosen.”
Aird added that challenges in managing inflation have been exacerbated by robust net overseas immigration, which has increased demand within certain CPI basket components, complicating the RBA’s efforts to steer inflation back to its target. As a result, monetary policy is likely to remain restrictive for a prolonged period.
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