Interest rates are about to be cut: 'RBA to eat humble pie'

Only a few months ago, there were a gaggle of economists forecasting a horrifying series of interest rate hikes by the end of 2024. As they lick their embarrassing wounds and engage in a bit of self-reflection of why they were so horribly wrong, investors are preparing for a series of interest rate cuts in Australia.

While the first rate cut in this cycle is unlikely at the Reserve Bank of Australia (RBA) meeting next week, the weakness domestically, in the global economy and the certainty that inflation is under control means that the oppressive interest rates will soon be reversed.

News in the last 24 hours shows why the RBA too is about to swallow some humble pie and move to reduce rates.

The Australian labour force data for August confirmed a moderate picture for jobs in Australia.

The unemployment rate held at 4.2 per cent – the same as in the US - hours edged up, employment growth was moderate and underemployment rose.

The worry is that there are no signs that the unemployment rate will remain in the low 4 per cent region - it has increased from a low of 3.5 per cent during 2023 and remains vulnerable to a rise as the economy remains weak.

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The labour market data dovetail with the news that the overall pace of economic growth in Australia is wickedly weak, just 1.0 per cent in the year to the June quarter.

This rate of growth is always associated with deteriorating labour market conditions and in 2024, the rules of economics remain firmly in place.

The other huge news was the interest rate cut from the US Federal Reserve.

It delivered its first rate reduction on this cycle, a cut of 50 basis points, with the promise of many, many more cuts to come.

Such is the worry of the US central bank about the growth performance of the United States, the outlook for unemployment and its confidence that inflation will gravitate to its target rate that another 200 basis points or so of rate cuts are priced in over the next 18 months.

While Australia never has and never will move interest rates in lock-step with the US, the broad trends up and down in interest rates are well established.

And it is noteworthy that the likes of Canada, the UK, the Eurozone, New Zealand, China, Sweden and Switzerland, to name a few, have already started their rate cutting cycles. Australia will join this club.

Making the interest rate cut case in Australia all but signed and sealed, next week sees the release of the August consumer price index.

It is set to confirm that inflation will fall to be within the 2 to 3 per cent target range, a feat unsurprising given the extreme restrictiveness of interest rates set by the RBA.

The fabulous economics teams at Westpac and the Commonwealth Bank are forecasting annual inflation to fall to 2.7 per cent; Antipodean Macro is going one better and expecting an inflation rate of 2.6 per cent.

Unless there is a huge miss to the high side, it is safe to say that inflation will be back on track as of next week.

While this inflation result will owe something to the negative impact on prices of a range of government policy changes, notably the Federal government’s electricity subsidy which is scheduled to end on 30 June 2025, other price pressures are also set to ease further.

When will the RBA cut rates and how low will they go?

These events have seen investors pricing in a 25 basis point rate cut by end 2024 and then a further 100 basis points of cuts into 2025.

This will take the official cash rate down to around 3 per cent from the current 4.35 per cent.

In the fullness of time, this will deliver a decent stimulus to the economy and cap the expected rise in unemployment.

The RBA must react to the fresh news and cut interest rates, and perhaps soon.