Here's when Westpac says the RBA will cut Australian interest rates

Are interest rates coming in 2024 or 2025?

| More on:
Animation of a man measuring a percentage sign, symbolising rising interest rates.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Last week certainly was a turbulent one for the Australian share market.

Hotter-than-expected US inflation data led to the market pushing back its interest rate cut expectations and sent many investors to the exits.

This wasn't helped by the release of minutes from the US Federal Reserve's latest meeting, which appeared to indicate that the central bank was concerned with how stubborn inflation was proving to be. The minutes said:

Participants generally noted their uncertainty about the persistence of high inflation and expressed the view that recent data had not increased their confidence that inflation was moving sustainably down to 2 percent.

Though, the central bank did acknowledge that there could be some seasonal factors at play here. It adds:

[A] few participants noted that residual seasonality could have affected the inflation readings at the start of the year.

Furthermore, the general feeling was that inflation will come down to the target rate over the medium term. The minutes state:

In their outlook for inflation, participants noted that they continued to expect that inflation would return to 2 percent over the medium term.

The question, though, is just when exactly that may happen and when US interest rates will start to fall.

What about Australian interest rates?

Australia is generally seen as being a touch behind the US in its battle with inflation. So, this news is likely to have hit hopes of a rate cut in the very near future.

For example, cash rate futures indicate that there is currently just an 8% probability of a rate cut at the Reserve Bank's next meeting in May.

Furthermore, based on the implied yield curve, the market is not expecting a 25-basis point cut to 4.1% until December.

Elsewhere, the latest Westpac Banking Corp (ASX: WBC) weekly economic report reveals that its Chief Economist, Luci Ellis, is feeling more positive about interest rate cuts.

She believes that the RBA will take action in both September and December, meaning the cash rate finishes the year at 3.85%.

Ellis then expects further interest rate cuts in 2025, reducing the cash rate to 3.1% by the end of 2025.

This is due to her belief that the United States and Australia are not comparable and just because expectations overseas have changed, doesn't mean they have to here.

Ellis points out "that simple cross-country comparisons of current levels of the policy rate, or with estimates of neutral rates, are not the whole story."

"Aside from the uncertainties around estimating the neutral real rate of interest, there are other things going on that need to be taken into account. The size and shape of fiscal support is one major divergence that should not be ignored," she adds.

Overall, there could be some relief around the corner for borrowers according to Westpac's economic team. Time will tell if that is the case.

Motley Fool contributor James Mickleboro has positions in Westpac Banking Corporation. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Share Market News

A susccesful person kicks back and relaxes on a comfy chair
Best Shares

If I could only buy and hold a single ASX share forever, it would be this one

There are two reasons why this stock is my first choice...

Read more »

young woman reviewing financial reports at desk with multiple computer screens
Opinions

Brokers' verdict on 4 popular ASX 200 financial stocks

Financials outperformed every other sector in FY25. What should you do now with these 4 stocks?

Read more »

two colleagues high five each other as they sit side by side at a long desk in front of their laptop computers in an office environment.
Share Gainers

Why Bapcor, Ramelius, Sandfire, and WIA Gold shares are rising today

These shares are having a better day than most on Tuesday. But why?

Read more »

Businessman using a digital tablet with a graphical chart, symbolising the stock market.
Share Market News

Is it too late to invest in the record setting S&P 500 stock gains?

A top broker reveals what to expect next from the surging S&P 500 Index.

Read more »

A young woman holds an open book over her head with a round mouthed expression as if to say oops as she looks at her computer screen in a home office setting with a plant on the desk and shelves of books in the background.
Share Fallers

Why Boss Energy, DroneShield, Greatland, and Viva Energy shares are tumbling today

Let's see why these shares are out of favour with investors on Tuesday.

Read more »

Man smiling at a laptop because of a rising share price.
Broker Notes

4 ASX shares to buy this week: experts

Looking for investment inspiration?

Read more »

Miner and company person analysing results of a mining company.
Energy Shares

Should you buy Boss Energy shares now after Monday's huge sell-off?

Macquarie gives its verdict on Boss Energy shares following Monday’s crash.

Read more »

Excited couple celebrating success while looking at smartphone.
Broker Notes

Macquarie forecasts 28% upside for this ASX All Ords stock

Let's see why the broker is feeling bullish about this name.

Read more »