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Inflation currently remains too high for the RBA to reduce interest rates
The bottom line is that the outcome of the RBA November Board Meeting likely won’t have borrowers jumping for joy. Australian inflation remains too high, and the RBA will be keeping monetary policy “sufficiently restrictive” until it has greater confidence that inflation is sustainably headed back to the 2-3% target. This will require one or possibly two quarterly trimmed mean inflation prints of 0.7% or lower in the absence of a weaker labour market. The latter is looking positive as SEEK job advertisements have stabilised in recent months, employment growth has been strong, and unemployment remains very low.
The RBA’s latest forecasts anticipate continued moderate economic growth - around 2.25% in 2025 and 2026 - as being sufficient to slowly lower inflation. It could hit 2.5% at the end of 2026, while producing only a modest rise in unemployment, to 4.5%.
How the US can influence interest rates in Australia
The past month has reminded us that accurate longer-term interest rate forecasting in Australia needs to be based on accurate longer-term US interest rates (see chart below). In the US, market participants have reassessed the likelihood of significant interest rate cuts being delivered over the next twelve months.
Arguably the bigger influence on interest rates has been ongoing contemplation of the potential policies the new administration in the White House decides to implement. Markets have factored in continuing large US budget deficits under either administration. However, there could be an even more inflationary environment under a Trump administration, given indicated policies on tax cuts, tariffs and immigration.
What this means for Australian businesses in the short to medium term
The RBA most likely won’t be reducing Australian rates before quarterly inflation prints are 0.7% or lower. While it’s likely inflation will continue to ease next year, it looks like the RBA won’t have sufficient confidence before May next year, rather than early 2025 as previously expected. Even then, big falls in Australian interest rates appear unlikely. This likely also means the next Federal election will not occur until May.
Developments in the US economy and interest rate markets always have a significant influence on Australian longer-term borrowing rates. Markets are expecting continuing elevated US budget deficits. This should support US and global growth but means that US cash rates won’t fall as much as previously expected.
The RBA’s forecasts anticipate a further slowish period for Australian growth and a slow grind in further reducing price pressures. Encouragingly, unemployment is expected to remain low. Business owners should continue seeking out productivity and process improvements where possible, to offset the higher costs of doing business.
