Bendigo Bank’s August Economic Update

Volatility in financial markets is to be expected at this stage of the cycle says Bendigo Bank’s Chief Economist who sticks with his long running forecast Aussie borrowers will see some interest rate relief in 2025.

In his August Economic Update released today, David Robertson said that while the end of tightening cycles are generally messy and unpredictable, Australians should expect:

• The RBA to be in a position to cut rates next year, around 6-9 months after other comparable central banks e.g. in Canada, the US and New Zealand.
• The timing will be dependent on core inflation getting closer to 3 per cent, which we hope to see early next year.
• While conditions for households remain challenging due to persistent levels of inflation, real disposable income is forecast to improve next year.

“There have been sudden swings in opinions around RBA monetary policy of late, with the market briefly pricing in another rate hike until the quarterly CPI data landed on the low side, with core inflation dipping below 4 per cent. Equally, the subsequent renewed calls for an RBA cut this year appeared to be another market overreaction,” Mr Robertson said.

“Michele Bullock sensibly pushed back on the notion that the RBA could cut rates this year, given the necessity to fully contain inflation to deliver sustainable economic growth and real wages growth, so we will need to see core inflation closer to 3 per cent before the RBA can cut rates, which we still expect to occur by May 2025.

“In times of high volatility, it’s important to consider outlier scenarios that could change these timelines, and while we don’t expect another RBA hike, one scenario that could put this view at risk would be another rise in excess demand in the economy and in labour markets, perhaps driven by the recent tax cuts and other fiscal support.

“So, the next few reads on employment will be important for official interest rates, and where the RBA are in the transition to an easing cycle compared to other central banks. While our labour markets have been more resilient than elsewhere, any fall in our jobless rate from here would add to the risk of another RBA hike. To put minds at ease, we don’t expect this to occur, and any move prior to November and the next quarterly inflation data is highly unlikely,” Mr Robertson said.

“Conversely, the case for an RBA cut (while still tenuous in our view) would be heightened by a sudden jump in our unemployment rate or any dislocation in global markets. So, while the recent selloff in equities is currently being described as a correction and not a bubble, stability in the markets is a key consideration for central banks. Similarly, volatility in FX and bond markets has been elevated, but there would need to be a major global issue for the RBA to be influenced by the financial markets.

“Looking elsewhere, the jump in US unemployment from 4.1 to 4.3 per cent sent markets into a tailspin last week as the assumed US soft landing scenario was put to the test, driving bond yields sharply lower along with stock markets and also extreme volatility for currencies.

“Markets appear very prone to overreactions at present, which is understandable given the extent of recent bull markets for equities and the assumption that conditions will remain benign, so a correction (at best) was somewhat inevitable.

“How this plays out now is anyone’s guess, with the VIX index of volatility spiking to its highest level this century outside the pandemic and GFC, but the implications for US interest rates are clear: the Federal Reserve will cut rates in September, although calls for a 50-basis point cut also appear to be an overreaction,” Mr Robertson concluded.

To watch David Robertson’s August Economic Update, please follow this link: August Economic Update video