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The Reserve Bank of Australia (RBA) will meet today, and most economists expect the central bank to cut interest rates by a quarter of a percentage point to 3.6 per cent, its third reduction this year.
Economists say lower inflation and softer GDP growth are supporting the case for another rate cut, leaving the RBA with little choice.
Headline inflation dropped to 2.1 per cent in May, down from 2.4 per cent in April, according to the Australian Bureau of Statistics.
Trimmed mean inflation, RBA’s preferred measure, also fell to a three-and-a-half-year low of 2.4 per cent in May from 2.8 per cent in April.
Devika Shivadekar, an economist at financial services firm RSM Australia, said last month’s inflation figures were the decisive factor behind a likely rate cut in July.
“Softer GDP growth, subdued business conditions, weak consumer sentiment and tame inflation readings all point to price pressures fading faster than the Bank first thought, so waiting until August to make a cut makes little sense,” Shivadekar said.
She said projected interest rate cuts are unlikely to have a follow-on effect on increased household spending.
“Even with earlier cuts, households are still cautious. Retail sales have been muted, and people seem to be saving for a rainy day rather than splashing out. A lower cash rate will help, but other worries, such as global uncertainty and possible tariffs, are weighing on spending,” she said.
However, some economists remain unconvinced about a July rate cut and believe the RBA may wait until August instead.
Westpac chief economist Luci Ellis said a cut was no “shoo-in”, but the board would have no clear rationale to hold until August as even a hotter-than-expected June inflation outcome would be unlikely to change the equation.
“A decision to cut in July is one of timing and tactics, not whether to cut at all,” said the former Reserve Bank economist.
“If the question is now or in five weeks’ time, the juice is not worth the squeeze. Just get on with it.”
But independent economist Sherman Chan told the ABC: “The Reserve Bank has made it pretty clear that the quarterly CPI [Consumer Price Index] series is their preferred measure [of inflation], so there is a chance they may wait until the June quarter CPI data before they decide,” she said.
“That would be in August.”
What a lower cash rate means for mortgages
If banks pass the reduction on in full, financial comparison website Canstar estimates the average variable rate for owner-occupiers could fall to about 5.55 per cent.
Sally Tindall, Canstar’s data insights director, said the expected cut is a sign Australia has started its descent down the “rate hike mountain”.
“While the relief from an RBA cut is reasonably minuscule in comparison to the previous 13 hikes, four of which were doubles, every small release of pressure is welcome. A third cash rate cut in four meetings will also be further confirmation we’re now coming down the other side of the rate hike mountain,” she said.
“Whenever rate relief comes, we expect the banks to step up and pass it on in full to their variable customers. This would see the average owner-occupier variable rate drop to around 5.55 per cent; however, borrowers can and should aim lower than this,” Tindall said.
But Canstar said many borrowers are choosing not to pocket the savings.
“Just 10 per cent of eligible Commonwealth Bank customers asked to lower their direct debits after May’s reduction, while the rest left repayments unchanged,” it said in a statement.
Will rates fall further this financial year?
Shivadekar expects the cash rate to end the financial year at 3.35 per cent, implying one more cut following the anticipated July move.
She said if household spending falters further, there could be room for an additional cut that would nudge the rate towards 3.1 per cent.
“If you look at our global peers, they are somewhat cautious and still responding to inflation control measures, but the RBA is responding to local conditions, including slowing private sector momentum, reduced public stimulus, and China’s outlook. All three are very important for us domestically.”
— With additional reporting by the Australian Associated Press
