Investing.com–The Reserve Bank of Australia (RBA) is now expected to start cutting interest rates from May next year, instead of February, Westpac said in a note, although the central bank is likely to cut rates aggressively.
Westpac said concerns over sticky inflation, a robust Australian job market and improving consumer sentiment could potentially delay any easing from the RBA.
“An earlier start in February or March is still possible, but it is no longer more likely than a May start date,” Westpac’s Chief Economist Luci Ellis wrote in a note.
The late start is also an uncertain scenario, if inflation does not decline as the RBA is currently forecasting, Ellis said.
The RBA held rates steady at a 12-year high of 4.35% in its November policy meeting, as expected, and said the policy would need to remain restrictive until the inflation was tamed.
The country’s consumer price inflation fell to 2.8% last quarter, within the central bank’s 2-3% target for the first time in three years, but core inflation remained elevated. Government subsidies on energy have helped ease headline inflation in recent months. But high housing and food prices, coupled with steady consumer spending, have kept underlying inflation elevated.
The minutes of the RBA’s latest meeting showed that the central bank needed to see a sustained decline in inflation before it could begin trimming rates. The RBA only expects inflation to fall within its 2% to 3% target range by 2026.
Still, Westpac expects the central bank to cut rates sharply once it begins an easing cycle. The delay in easing will lead to “front loaded” initial moves by the RBA, with consecutive cuts in late May and early July, Westpac’s Ellis said.
“The longer the RBA Board waits, the faster they will need to move thereafter, as it would then be more likely that they have hesitated too long,” she added.
“If employment growth slowed even moderately, things could unravel quite quickly,” Ellis said. Australia’s job market growth slowed in October after six straight months of outsized growth, although the sector still remained strong.
Westpac’s outlook for the RBA is more hawkish than other brokerages. ANZ expects the central bank to begin cutting rates by February 2025.
