Insight on cash rate pause as economy runs at capacity
When the Federal Reserve releases the minutes of its last meeting in early November, it will shed more light on its decision to reject further rate cuts to homeowners.
The Australian central bank kept interest rates steady at 3.6 percent with a unanimous decision after the meeting, following three reductions earlier in the year.
Major banks have now shelved their predictions of another rate cut in 2025, with the RBA’s rate-setting board meeting once again this year.
Headline inflation rose by one per cent in the September quarter and RBA governor Michele Bullock said this was above forecasts for the central bank’s measure of preferential prices.
According to the figures announced after the Central Bank’s interest rate decision, the unemployment rate dropped to 4.3 percent in October, which also reduces the expectations for an interest rate cut.
Economic conditions have led to speculation that the central bank’s next move could be an interest rate increase rather than a rate cut.
HSBC chief economist Paul Bloxham said the possibility of a rate hike probably won’t come until 2027, but as inflation continues, the cycle of cash rate cuts may already be over.
“It’s too early to tell, but over time it may become clear that the cash rate has already been reduced a bit too much,” he said.
“The economy is already operating at or slightly above its capacity. So demand is already growing faster than the supply side of the economy.”
“With core inflation already rising to the upper end of the RBA’s 2 to 3 per cent target, we see it will be extremely difficult to get inflation back to 2.5 per cent sustainably.”
Mr Bloxham said a large increase in unemployment or a reduction in growth could push inflation into the middle of the target range, but both were unlikely.
“We expect the RBA to be quite patient. We see that the RBA will remain stable in the short term as long as core inflation does not accelerate,” he said.
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