The Reserve Bank of Australia (RBA) is under increasing pressure as it approaches a potential interest rate hike on Melbourne Cup Day, with analysts suggesting that the bank may need to raise rates to maintain its credibility amid ongoing inflation concerns. RBA Governor Michele Bullock has highlighted the urgency of addressing inflation, which has remained above the bank's forecasts, complicating its plans to gradually return inflation to the target range by 2025. The RBA's credibility is now in question, as higher inflation than interest rates suggests that monetary policy is not sufficiently restrictive. Although inflation has been trending down since its peak in December 2020, persistent supply shortages and economic shocks continue to challenge the RBA's objectives. The impact of higher interest rates could slow demand and help balance supply, but there are risks of over-tightening the economy, potentially leading to a downturn in the property market and job losses. [e47975d1]
As the RBA navigates these challenges, financial markets are already anticipating dual interest rate cuts in April and May 2025, with at least three cuts expected throughout the year. This would bring the cash rate down to 3.60%. Analysts from Barrenjoey, including Andrew Lilley, suggest a gradual reduction in rates, similar to strategies employed by the Bank of England. However, Judo Bank's Warren Hogan argues that the economy remains robust, indicating that market expectations for rate cuts may be misguided. Current economic indicators show that annual real GDP growth is at its weakest since December 1991, with real per capita GDP contracting for seven consecutive quarters and real per capita household disposable income down 8.4% since Q2 2020. Despite these challenges, unemployment fell to 3.9% in November 2024, suggesting a complex economic landscape. The upcoming Q4 2024 CPI data, due on January 29, could significantly influence the RBA's decision regarding a potential rate cut in February. [cb5d5e8e]