Commonwealth Bank reveals RBA 'backpedal' in major 2024 interest rate cut sign: ‘Significant’

The Reserve Bank of Australia (RBA) has kept interest rates on hold for the better part of a year. But there was a tiny change in its latest message that could be a sign that interest rate cuts are coming.

The latest RBA board minutes from the September meeting ditched the grim warning that there would be no interest rate cuts in the near future. Instead, the central bank reiterated it wanted to keep its options open and wasn’t ruling anything in or out.

Commonwealth Bank (CBA) head of Australian economics Gareth Aird said the September minutes were “a lot less hawkish” than August and had a “dovish tilt”.

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“The September Board Minutes have removed the line that, ‘it was unlikely that the cash rate target would be reduced in the short term’,” Aird said.

“We view this change as significant. The Board has now back-pedalled from its forward guidance.”

Aird said this shift was “prudent” given the RBA is data dependent and it appears increasingly likely that underlying inflation for the September quarter will come in below the central bank’s forecast, while household consumption growth won’t rebound as strongly.

Are you a mortgage holder waiting for rate relief? Share your story with tamika.seeto@yahooinc.com

“We continue to expect the RBA will commence normalising the cash rate in December 2024 with a 25 basis point interest rate cut,” Aird said.

“We look for 125 basis points of RBA easing by the end of 2025 that would take the cash rate to 3.10 per cent.”

Two scenarios for 2024 interest rate cut

The RBA minutes revealed two scenarios that could justify cutting interest rates.

• If the economy was “significantly weaker than expected” and this placed more pressure on underlying inflation than expected.

• If inflation “proved less persistent than assumed, even without weaker-than-expected activity”.

Economist and Yahoo Finance contributor Stephen Koukoulas has argued that inflation has hit the RBA's target band of 2 - 3 per cent and that the board must act to give interest rate relief.

The August consumer price index reported annual inflation fell to 2.7 per cent. down from the peak of 8.4 per cent in December 2022.

But the RBA said it is more focused on underlying inflation, which wouldn't be impacted be factors like the $75 per quarter electricity subsidy or volatile petrol prices.

"The RBA is refusing to cut interest rates because it is guessing that the step lower in inflation in August will be temporary, a call that is based on faith, not facts," he wrote.

He said the aggressive rate hiking cycle had acheived what it set out to do — "smash" the economy and bring down inflation. Koukoulas argued now there's a bigger threat that needs to be tackled.

"Inflation has been beaten. The focus now is limiting the rise in unemployment," he said.

What do the other major banks think?

ANZ Bank’s head of Australian economists Adam Boyton said the minutes were “a clear step down in the RBA board’s hawkishness”.

“This leaves the door open to a shift to neutral by the end of this year and then easing in early 2025. We continue to expect the first cash rate cut in February 2025,” Boyton said.

Westpac chief economist Luci Ellis said the RBA’s hawkishness was “toned down in the post-meeting statement and minutes for the September meeting”.

"However, we detect an increasing emphasis on assessments of financial conditions more broadly, and a willingness to see these as a reason to hold the cash rate where it is,” she said.

Westpac expects the RBA will cut rates in February 2025, with four 0.25 per cent cuts to bring the cash rate down to 3.35 per cent.

NAB head of market economics Tapas Strickland said the minutes were broadly consistent with the bank’s recently revised view of the RBA cutting rates in February 2025, rather than May 2025.

AMP chief economist Shane Oliver also noted the interesting RBA omission regarding short-term cash rate cuts but noted Governor Bullock "effectively repeated" the line in the post-meeting press conference "so presumably it still applies".

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