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What's Behind the Delay? Experts Weigh in on the Projected Start of Interest Rate Reductions in 2025

 

In a grave revelation for Australians grappling with an escalating cost of living, a handful of economic analysts have cautioned that interest rates may not recede until the year 2025. 

Projections emanating from bond markets, key indicators of interest rates yet to come, intimate that rate reductions slated for 2024 might be scrapped. This outlook aligns with that of a previous prominent economist at Reserve Bank of Australia (RBA). 

Jonathan Kearns, the Chief Economist at Challenger and former Head of Domestic Markets at the RBA until March of the current year, conveyed  his predictions of stagnant interest rates until 2025. 

According to Kearns, Australia now confronts a 'protracted plateau instead of a pinnacle in interest rates,' and in the ensuing twelve months, the rates are 'more inclined to ascend than descend.' 

However, not all share Mr Kearns' viewpoint. Among the 42 economists polled by The Australian Financial Review, only five envisage the suspension of rate cuts in 2024. 

Nevertheless, there is a progressive shift among economists - still advocating rate cuts in 2024 - in the anticipated time frame for the inaugural reduction. 

As per the narrative in the previous year, economists predicted a fall in rates commencing possibly in February 2024, a timeframe that eventually extended to May 2024. 

Now, the consensus for the possible onset of the fall is August 2024. 

Impending anxiety regarding burgeoning inflation in the service industry and a robust job market constitute principal reasons for economists’ predictions of prolonged freeze on rate cuts. 

Data divulged last week by the Australian Bureau of Statistics (ABS) indicated the first surge in the consumer price index since May, driven by escalating petrol prices and rents. In August, the overall prices spiked by 5.2 percent, a slight increase from the 4.9 percent growth in July. 

However, the RBA's decisions on interest rates hinge on 'core inflation'. This model excludes fluctuating commodities such as petrol and fresh produce from its calculations. 

Based on this index, the inflation rate in August descended to 5.5 percent from 5.8 percent in July. 

Kearns drew attention to mounting rental costs, soaring electricity prices, petroleum prices seeping through to fuel costs, and rapid wage growth as key impediments to the persistent inflation affecting the interest rate landscape. 

Wage growth, devoid of corresponding enhancements in productivity, could entrench 'incessant inflation,' asserts Kearns. 

Kearns also conceded the difficulty in predicting the outcomes of a lag in wage growth on inflation. Yet, the recent minor rise in the unemployment rate should theoretically take some heat off wages. 

In the wake of Tuesday's interest rate decision, a widespread consensus anticipates the RBA will maintain the status quo on interest rates. This includes Kearns and economists surveyed by Finder - a view that aligns with bond traders who estimate an increase with a probability of a mere 10 percent. 

However, the probability of a final rate hike before the conclusion of 2023 appears to be growing, with 50 percent of economists surveyed by The Australian Financial Review projecting a 0.25 percent increment, pushing the official cash rate to 4.35 percent by 2023's end. 

Conversely, bond traders anticipate another boost in 2023 with a likelihood of 62 percent. 

If the RBA deems it necessary to increase rates again, the expectation is that it will do so post the October 25 release of the quarterly consumer price index report, possibly in November.

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