Local borrowers are growing increasingly restless, and it’s easy to understand why. Reserve Bank of Australia (RBA) governor Michele Bullock recently indicated that the RBA does not expect to cut interest rates this year, leaving many questioning the rationale behind this stance.
At first glance, the RBA’s reasoning seems straightforward: Australia’s interest rates rose later and less aggressively than those in comparable economies, resulting in a slower process to curb inflation. However, this explanation overlooks key aspects of the Australian economy.
Australia is uniquely consumption-driven and carries the highest household debt levels globally. This makes the economy particularly sensitive to interest rates, especially since most mortgages are on floating rates. Any tightening has a rapid and significant impact on household disposable income, meaning the RBA’s tightening measures have effectively been more severe than in many other nations, aside from Norway.
Moreover, Australia faced a second wave of inflation due to government missteps, particularly Treasurer Jim Chalmers’ failure to tackle the gas cartel and an unexpected surge in immigration. These factors have led to rising utility bills and rents. However, this trend is now reversing. The inflow of international students—who heavily impact rental markets—is slowing, and government energy rebates are expected to alleviate inflationary pressures.
The RBA’s insistence that higher trimmed mean inflation is more significant than lower headline inflation is becoming less tenable. Headline inflation is currently within the RBA’s target band and is poised to weaken further. Approximately 20% of the Consumer Price Index (CPI) consists of administered prices tied to falling headline inflation, suggesting a downward adjustment is imminent.
Additionally, as award wages slow, Australian wage growth is forecasted to dip below 3% in the coming year. We have never experienced a wage-push inflation cycle, and pay growth is likely to retract further.
Finally, with weak stimulus measures in China, national income is expected to face pressure throughout 2025, with potential worsening in 2026. Given these factors, it’s increasingly unlikely that the RBA will mirror the aggressive rate hikes of the Reserve Bank of New Zealand.
While the RBA may hold its current position for now, a pivot to cut rates before Christmas is likely. Local borrowers need relief, and the RBA must act swiftly to address the unique challenges they face.
