The future of interest rates is a hotly debated topic with varying predictions from major financial institutions:
Warren Hogan, Chief Economic Advisor at Judo Bank, anticipates 3 rate rises.
CBA suggests there might be some rate rises.
Westpac predicts no rate rises.
ANZ foresees a rate cut around November.
This divergence in forecasts can be confusing. Recent inflation data for the March quarter came in 0.2% above expectations, leading to the term 'sticky' inflation.
THE MARCH QUARTER ANALYSIS
How Does the ABS Calculate Inflation?
The Australian Bureau of Statistics (ABS) calculates inflation by indexing a basket of about 90 goods and services. Each quarter, they survey approximately 100,000 prices in every capital city, comparing the price changes to the previous quarter. The ABS also considers shrinkflation and changes in taxes, such as the increased taxation on tobacco. Prices fluctuate, with some rising significantly, others remaining flat, and some decreasing.
The Current Economic Landscape
Retail sales are at their weakest outside the pandemic, reflecting the cost-of-living crisis. Mortgage interest rate hikes over the past two years, and high rents and insurance premiums having really slugged everyday Australians. Businesses face pressure to avoid price hikes, as consumer spending is constrained. While retail and grocery prices are under control, service prices, driven by high rents, insurance premiums, supply issues and disruptions are the major contributors to persistent inflation.
Household expenditure has flattened, the economy is weakening, GDP growth is slowing, employment growth has decelerated, and the unemployment rate has increased. Job ads and vacancies are down, and business bankruptcies are at record levels.
Housing Market Dynamics
Overall, house prices are up 0.6%. While Victoria and NSW have seen slight declines, NT and Tasmania have also dipped. Conversely, WA, SA, and Queensland are experiencing significant increases, with WA up 20%. This along with their extremely tight rental markets in these three states has made property investors flock to WA, SA and QLD. Building approvals are down, affected by high material costs and Labor shortages, which continue to support house prices by limiting supply.
Conclusion on Rates
All international markets are pricing in rate cuts and we at First National Bundaberg believe Australia will follow suit, we believe there will be no more rate hikes. While the current rate might persist longer than desired, the economy cannot withstand another increase. We predict a potential rate cut later this year and expect further cuts in 2025.