The Reserve Bank (RBA), which opted to keep the OCR on hold in November, is expected to begin cutting the cash rate in May, delayed from February, reflecting global trends of more aggressive initial reductions, according to Westpac chief economist Luci Ellis (pictured above).
“Consecutive cuts in late May and early July” are anticipated, Ellis said, marking a change from the previous expectation of gradual reductions.
The terminal cash rate is forecasted at 3.35%, likely reached by the end of 2025.
Ellis said that the timing of rate cuts hinges on inflation aligning with RBA’s predictions.
The central bank remains cautious, with meeting minutes stating the board “would need to observe more than one good quarterly inflation outcome” before acting. This signals RBA’s intent to wait for sustained declines in inflation, particularly trimmed mean inflation, which has been slow to ease.
However, Ellis suggested that a delay might necessitate faster rate cuts later.
“The longer the RBA waits, the faster they will need to move thereafter,” she said.
The robust labour market and rising consumer sentiment, although below historical averages, have influenced RBA’s decision to wait.
Employment growth has surprised on the upside, but Ellis warned that any slowdown could quickly raise unemployment rates. RBA’s outlook also assumes optimistic consumption growth as inflation subsides.
Ellis expressed skepticism about this view, pointing to the limited economic impact of tax cuts and waning public demand.
“Australia could end up with an extended period of lacklustre growth,” she said.
Despite persistent inflation, wage growth has begun to slow, suggesting the RBA may overestimate labour market tightness, the Westpac insights showed.
Recent wage data prompted the RBA to revise its forecasts downward, with further adjustments likely.
Westpac’s analysis showed that while the outlook for rate cuts has shifted, the risks remain balanced. Quick economic changes could prompt an earlier pivot, as seen in New Zealand earlier this year. For now, all eyes are on inflation outcomes in the months ahead, Ellis said.
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