Why Interest Rates May Start Coming Down in November in Australia
Ujjwal Maheshwari, October 11, 2024
Interest rate is the cost of borrowing money. But it can also be defined as the reward for saving money over some time. Take an example of a mortgage or credit card. The original amount borrowed must be paid back, excluding a certain percentage of the loan amount as interest.
So, typically interest rates can be viewed as a critical factor in determining the overall economic stability of a country. Since interest rates significantly influence consumer behavior and business investments, it is essential to consider this factor in understanding the growth trajectory of a country.
The concept of inflation is not just Australia’s problem but it’s the world’s problem. With that said, increasing inflation tends to have critical effects on the economy. After seeing an extended period of rising interest rates aimed primarily at controlling inflation, many citizens are now wondering whether interest rates may start to come down. Several indicators hint at a possible shift in the monetary policies.
Economic trends
To analyze the trends in interest rates of a country moving towards a step down or a step up it is vital to understand certain reasons as to why the interest rate was high in the first place.
Combating Inflation
One of the very primary reasons why interest rates were raised in the first place was to combat the rising inflation. Following the economic impacts brought upon by the COVID-19 pandemic and the disruption of the global supply chain inflation peaked during 2022-2023. In mid-2022, inflation rates took off to a height of more than 7%. But in the recent years or so, they have begun to show signs of slowing down.
According to the Reserve Bank of Australia (RBA), their key priority is to bring the inflation rates down towards their target band of 2% to 3%. But as of September 2024, the inflation rate was seen to have stabilized around 4% to 5%. As these levels are manageable, the RBA is working towards bringing them to their earmark.
If the RBA succeeds in bringing the inflation rates down, it could give them breathing room to lower interest rates without actually reviving inflation. The month of November serves as a pivotal point in supporting this premise. According to some analysts, if inflation continues to balance itself in the 4% to 5% range or if it moves towards a decrease, then the RBA could start easing interest rates in late 2024 or early 2025. This will ultimately support the economic growth of the country.
Slumping economy
Despite a modest 0.2% growth in the June quarter of 2024 and a 1.5% growth over the 2023-2024 financial year, Australia’s economy has been experiencing slower growth rates than initially anticipated. Their GDP growth in 2024 was marked to be under 2% which is significantly below their previous trends.
Arranging the puzzle, this slowdown is largely due to higher interest rates. This has in turn plunged consumer spending and potential business investments.
Impacts in different sectors
Increased interest and inflation rates together have dampened the Australian economy.
Large capital expenditure industries such as construction and manufacturing took a deep dive due to the higher cost of borrowing (and thus high interest rates).
Vanishing consumer trust as higher mortgage rates crush their average household budgets that were meant to tackle their day-to-day life.
According to the Australian Bureau of Statistics (ABS), retail sales growth has fallen from 1.5% in early 2023 to a mere 0.3% by mid-2024. Another major impact was sluggish retail sales.
Accounting for all these trends, the RBA needs to consider softening the interest rates to encourage spending and investing.
Global players
The global economy also plays an influential role in determining the domestic monetary policies. If other major economies such as the US or the EU (European Union) begin slashing down rates, then Australia may decide to follow in their footsteps. The Federal Reserve in the US has prompted potential rate cuts in late 2024 or early 2025 if the inflation starts to cool down.
Australian financial markets are highly tied to global markets. So, there exists a need to maintain competitiveness in terms of interest rates. So, if the US and the EU move towards cutting down interest rates, then Australia needs to remain relevant. So, they will follow suit hinting the RBA to cut rates as well. This will help Australia to persist as an attractive investment opportunity while sustaining domestic growth.
Unemployment
Australia’s labor market has remained substantial despite the economic challenges. Its unemployment rate is hovering at a low of 3.6% in August 2024. However, the generation of an extra 47,000 jobs in August has significantly reduced the hope of RBA cutting interest rates.
With the average wage growth lagging behind the cost of living, many households are struggling with rising mortgage repayments, higher rent, and skyrocketing elementary prices such as groceries.
Accelerated household debts
Australia is considered to have one of the highest household debt levels in the world. They are proving that their interest rates have significantly increased the cost of living. A report by RBA indicates that the average Australian household with a mortgage has seen their repayment regulations rise over by a whopping 25% since 2022.
With such high levels of debt, it is possible that it could trigger financial instability, especially in the sectors of the housing market.
All of these potentially problematic reasons could lead to a cutting down of interest rates right during late 2024 (possibly in November) or even during early 2025.
RBA’s Policy cycle
Central banks generally follow cyclic operations. That means periods of tightening policies (increasing rates) are followed by periods of loosening policies (lowering rates). This phenomenon can balance inflation and stimulate growth.
Since the current monetary policies are focused on tightening policies with increased interest rates then according to the equilibrium law, the RBA could shift to an easing cycle. Rate cuts would support economic recovery and bring back the lost consumer confidence.
Conclusion
Several key factors indicate that Australia could see a decrease in interest rates as early as November 2024. These include easing inflation, and high household debt and thereby controlling the economy and the global policy trends. A rate cut by the RBA essentially aims in stimulating economic activity and provide relief to households burdened by rising living costs.
As every country is trying to navigate through post-pandemic complexities, monetary policies need to strike the right balance between controlling inflation and promoting sustainable growth. If these trends continue, Australians could see a sliver of hope on the horizon as lower interests will prevail thereby restoring financial stability.
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