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ANZ's head of Australian economics, Adam Boyton, predicts that interest rates will not ease until early 2025 due to firmer-than-expected household consumption, resilience in the jobs market, and persistent inflation. While ANZ economists retain projections for two follow-up rate cuts after February, they warn that risks to that projection are skewed to the downside. The Reserve Bank of Australia (RBA) governor, Michele Bullock, has also indicated that a rebound in inflation could force the bank to hike interest rates once again [ecdcb071].
Mortgage stress is climbing in Australia amid cost of living pressures and high interest rate levels, but the majority of borrowers are still meeting their loan repayments. The RBA has aggressively raised interest rates 13 times since May 2022 to contain inflationary pressures. The council, which coordinates the management of Australia's financial system, warned that while most borrowers had handled the increase in interest rates, the proportion of mortgagors falling into arrears had climbed. The RBA has left the cash rate on hold at 4.35% since November as it awaits further evidence that inflation is returning to its target band [ecdcb071].
Data released by the Australian Securities and Investments Commission (ASIC) last month showed the number of hardship notices had risen 54% in the final three months of 2024 compared with the corresponding quarter a year earlier. In May, the ASIC urged banks to increase the level of support they provided struggling borrowers after a review found accessing hardship assistance was too hard. While the corporate regulator's review found that experience differed between lenders, in the worst cases some banks had ignored requests for assistance, in effect 'abandoning customers who needed their support' [ecdcb071].
Treasurer Jim Chalmers noted that measures slated to come into effect on July 1 would ease pressures faced by households. The council also considered risks from domestic lending to commercial real estate, which remained contained due to banks' low exposures, conservative lending practices, and the relatively strong financial positions of commercial real estate owners [ecdcb071].
Australia is one of the most sensitive countries to monetary policy based on its housing market, according to a study by the International Monetary Fund (IMF) [cc37cf29]. Despite this sensitivity, the Australian economy has remained resilient. However, factors that have contributed to this resilience, such as low proportions of households on fixed mortgages, high loan-to-value ratios, high levels of household debt, constrained housing supply, and potentially overvalued homes, are starting to wear thin [cc37cf29]. Many people are struggling with mortgage payments, household savings are being eroded, and affordable housing options are reducing [cc37cf29]. The potential for a mortgage cliff has not occurred due to well-capitalized banks and their ability to assist mortgage holders. However, this may no longer work as struggling mortgage holders are offered interest-only loans, extended loan terms, or debt consolidation [cc37cf29]. Constrained housing supply in Australia makes monetary policy more effective, but rising construction costs are limiting supply in affordable areas [cc37cf29]. High levels of savings have offset sensitivity to interest rate rises, but household savings are now at a 17-year low [cc37cf29]. House prices offer early clues as to where households are feeling the impact of monetary policy, with Melbourne and Hobart showing growing weakness. Victoria and Tasmania may already be in recession [cc37cf29]. Rate cuts are needed to prevent the rest of the country from following suit [cc37cf29].
Interest rates and inflation in Australia are lower than expected. Australians feel their finances have worsened and the economy is getting worse. Real income per Australian has been sliding. Australians are buying less online and in shops. Commonwealth Bank transaction data shows spending on essentials is failing to keep pace, except for older Australians. Inflation and interest rates are lower than predicted a year ago. The probability of a recession in the next two years has decreased. Inflation has been easier to subdue than expected. The Reserve Bank has held off on increasing interest rates. Businesses are cutting costs and becoming less likely to offer pay rises. Rising operational costs and customers spending less are affecting Canberra small businesses. The annual inflation rate might climb to 3.8% or 4% in May. Lower inflation may mean slower price rises and an end to talk of further interest rate rises. Tax cuts legislated by Scott Morrison are set to make households feel better about the future. The tax cuts are worth about $2,200 per year for the average household. The consumer survey recorded a slight uptick in confidence. The experts' forecasts for the next financial year are expected to be brighter [897d4900].
The RBA has time as inflation continues to show progress. The monthly inflation figure was -0.1%, with food progressing slowly, alcohol and tobacco being tax-driven, clothing plunging, and housing being a problem, particularly rents and building costs. Services are slowing except for finance. Goods are still disinflationary while services are still slowing. Assistant Governor Christopher Kent is satisfied with the state of financial conditions, as monetary policy tightening has led to restrictive financial conditions. Demand is compressed enough and the supply side is responding, leading to a decline in inflation. The RBA will receive another monthly report before the deflationary burst of bill subsidies in July and will meet on August 5-6. The author, David Llewellyn-Smith, does not believe there is enough to hike interest rates again unless tax cuts lift demand [43c53f0b].
Australia's top economic forecasters expect the Reserve Bank to start cutting interest rates by March next year, taking 0.35 points of its cash rate by June. The panel of 29 forecasters assembled by The Conversation expects a further cut of 0.3 points by the end of 2025. The forecasts were produced after last week's news of a higher than expected monthly consumers price index. Only two expect higher rates by mid next year. Only four expect no change. Eight of the 29 expect the first cut to come this year, by either November or December. One of them is Luci Ellis, who was until recently assistant governor (economic) at the Reserve Bank and is now at Westpac. She and her team are forecasting three interest rate cuts by the middle of next year, taking the cash rate from 4.35 to 3.6 per cent. The panel expects inflation to be back within the Reserve Bank's 2-3 per cent target band by June next year, and to be close to it (3.3 per cent) by the end of this year. The panel expects wages growth to fall from 4 to 3.5 per cent over the year ahead, contributing to downward pressure on inflation, but to remain higher than prices growth, producing gains in so-called real wages. The panel expects Australia's unemployment rate to climb steadily from its present historically low 4 to 4.4 per cent. Panellists expect China's economic growth to slip from 5.3 to 5 per cent and US growth to slip from 2.9 to 2.4 per cent. Australia's economic growth is expected to climb from the present very low 1.1 to 1.3 per cent by the end of this year and to 2 per cent by the end of next year. Home prices are expected to continue to climb notwithstanding economic weakness. Sydney prices are expected to increase a further 5 per cent in the year ahead after climbing 7.4 per cent in the year to May. Melbourne prices are expected to rise a further 2.8 per cent after climbing 1.8 per cent in the year to May. The panel expects non-mining business investment to continue to climb in the year ahead, by 5.2 per cent, down from 6.9 per cent. It expects the Australian share market to climb by a further 5.6 per cent [e7021e15].
Higher mortgage repayments, rents, and other living costs have been dampening consumer confidence. The latest survey from Westpac and the Melbourne Institute is unlikely to show much improvement in consumer mood. Increased talk of another rate hike may cause the consumer sentiment index to remain weak or even fall. Stronger-than-expected monthly inflation data for May has led to speculation that interest rates might need to stay elevated for longer or rise further. Retail trade numbers were also on the hot side, likely due to early financial year sales rather than increased consumer spending. AMP Australia chief economist Shane Oliver believes interest rates have peaked and the next move will be down. The National Australia Bank is expected to release its monthly survey on the business sector. Businesses have been reporting a gradual decline in conditions due to higher interest rates and global headwinds. Australian Bureau of Statistics data releases include lending indicators, monthly business turnover indicator, and overseas arrivals and departures. The RBA's head of economic research, John Simon, is scheduled to speak at the Australian Conference of Economists and may provide useful details about the central bank's view of the economy. The Australian stock exchange is expected to open mixed on Monday. Wall Street finished firmer on Friday amid expectations of interest rate cuts in September. US jobs growth slowed marginally in June, and the unemployment rate rose to an over two-and-a-half-year high while wage gains slowed. Investors expect the data to stir more active debate on rate cuts when the Federal Reserve meets later this month. The odds of the US central bank easing in September jumped to 79%. The key Australian SPI200 futures contract lost 11 points on the weekend, paving the way for a choppy start to the week as investors consider the potential timing of domestic interest rate cuts. The local bourse ended lower on Friday with the S&P/ASX200 index closing 0.12% lower. The broader All Ordinaries dipped 0.11% [d2edea9a].