When will interest rates fall? Not until November say big banks, as ‘incredibly strong’ migration makes the RBA’s task ‘more difficult’

When will interest rates fall? Not until November say big banks, as ‘incredibly strong’ migration makes the RBA’s task ‘more difficult’
  • PublishedMay 1, 2024

Commonwealth Bank economists have revised their interest rate forecasts, saying they now don’t expect the Reserve Bank to cut rates until November.

They had been expecting a rate cut in September, followed by one in November and another in December.

But after last week’s stronger-than-expected March quarter inflation figure, they say the only rate cut Australians will see this year will probably be in November.

Their revised forecasts mean the economics teams working for Australia’s “Big Four” banks are now all on the same page.

They all predict there will only be one rate cut this year, in November, worth 0.25 percentage points.

CBA senior economist Gareth Aird says extremely strong population growth is making it much harder for the RBA to return inflation to target.

“Monetary and fiscal policy are working in tandem,” he wrote on Tuesday.

“But incredibly strong net overseas immigration has put upward pressure on some components of the consumer price index basket. This has made the RBA’s task of returning inflation to target more difficult.

“As a consequence, monetary policy is now likely to stay at a restrictive setting for longer.

Ratecity table of Big Four rate forecasts

“We now see a more elongated and conservative easing cycle than previously expected. Our base case sees the cash rate gradually cut from November 2024 to reach 3.10 per cent at end‑2025,” he wrote.

The cash rate target is currently 4.35 per cent.

Within hours of CBA releasing its revised forecasts on Tuesday, new data from the Bureau of Statistics showed retail spending had fallen by 0.4 per cent in March, which was a much larger fall than expected.

ABS officials said the decline in retail spending in March was the weakest on record, outside of the pandemic period and introduction of the GST, when comparing turnover to the same time in the previous year.

Retail turnover grew by 1 per cent in January, and by 0.2 per cent in February with help from Taylor Swift’s Australian tour.

But that Taylor Swift-inspired boost to retail spending in February was wiped away in March, driven by large declines in New South Wales (-1.1 per cent) and Victoria (-0.8 per cent).

Callam Pickering, APAC economist at global job site Indeed, said there had been a clear shift in sentiment after last week’s surprise inflation figures, with some economists arguing there was now a clear case for more interest rate hikes.

However, he said, those calls for rate hikes seemed “somewhat premature” and higher interest rates risked pushing the economy into recession.

“Australian households are struggling and retail conditions are dire,” Mr Pickering said.

“Given rising prices and strong population growth, the average Australian household is buying considerably fewer retail goods than they were a year ago.

“Further tightening in the current environment would leave the nation at clear risk of severe downturn or recession,” he said.

Anneke Thompson, CreditorWatch chief economist, said the very weak retail sales figures in March would be a relief to the RBA and reduced the threat of “sticky inflation” in the goods category.

But she said spending on services was still driving inflation — and services inflation was less impacted by monetary policy.

“The RBA can take comfort that their tightening measures are helping drive down inflation,” she said on Tuesday.

“However, this will be of little comfort to businesses in the retail trade, food and beverage and construction sectors, where default and external administrations are on a rising trend,” she warned.

Sean Langcake, head of macroeconomic forecasting for Oxford Economics Australia, said last week’s surprise inflation data had sparked concerns that the RBA would have to raise rates again to rein in inflation, but consumer demand was clearly “very restrained” at the moment.

“The underlying trend in retail spending remains very weak, with spending up just 0.8 per cent on a year earlier. Considering the brisk pace of population growth, this is a very soft trend,” he said.

“Strong price inflation for essentials like health and education and higher rent and mortgage costs are still putting the squeeze on household budgets and discretionary spending,” Mr Langcake said.

But late on Tuesday, Abhijit Surya from Capital Economics pushed back against the idea that weak retail sales would encourage the RBA to sit on its hands for a while.

He said his view was not the consensus, but he predicted the RBA would “take out an insurance policy” with one final rate increase at next week’s RBA board meeting.

“Given the RBA’s ostensible resolve to return inflation to target within a reasonable time frame, it can ill afford to look past the upside surprises in the latest CPI and labour market data,” Mr Surya said.

After last week’s higher-than-expected inflation figure, Judo Bank chief economic adviser Warren Hogan warned the RBA would have to raise rates three times this year, to 5.1 per cent, to ensure inflation didn’t get out of control.

But on Tuesday, Mr Aird from Commonwealth Bank said he thought the RBA would keep rates on hold for the next six months, given the economy was “still contracting” on a per person basis.

“Our expectation for below‑trend economic growth to continue over 2024 means that the labour market will further loosen and wages pressures will moderate,” he wrote on Tuesday.

“This will help to drag inflation back to the RBA’s target band.

“Notwithstanding, the disinflation process is likely to take a little longer than we previously anticipated due to very strong population growth continuing to put upward pressure on some non‑discretionary components of the CPI basket,” he said.

Interest rate cuts can’t come soon enough for banks struggling to maintain profits

CBA’s revised interest rate forecasts will feed into the debate about the profitability of Australia’s banking sector.

Many analysts see the rate cutting cycle as an opportunity for the major banks to claw back some of the net interest margin they have been losing by not passing on any rate cuts in full, when rate cuts finally eventuate, across all their mortgage products.

It’s part of a larger conversation about whether or not shareholders are overvaluing bank stocks at the moment.

The “big four” banks have enjoyed a strong run on the share market in the past six months – CBA and Westpac’s share prices are up 26 per cent from where they were back in November, NAB is up 22 per cent and ANZ is up 14 per cent.

Sentiment has cooled a bit of late, with the CBA giving up 5 per cent of its gains and the others a little less.

But the total shareholder returns of the banks so far this year is 6 per cent, around double the ASX200 average, and they’re trading at price-to-earnings multiples 16 per cent higher than the industrials.

Importantly, the three big banks reporting over the next two weeks are all expected to show a slide in profits from a year ago.

NAB is first to report on Thursday, and it is forecast to deliver a half-year cash profit of $3.6 billion, down around 13 per cent from the same period last year.

The story is likely to be the same at Westpac on Monday next week – a 13 per cent decline in profit to $3.6 billion, while the next day ANZ is tipped to produce a $3.6 billion profit, down 10 per cent.

Morgan Stanley’s bank watchers think shareholders are too optimistic about the big fours’ prospects in this environment.

“In our view, reporting season won’t deliver sufficient (earnings) upgrades to justify the optimism reflected in current trading multiples,” Morgan Stanley’s veteran bank analyst Richard Wiles recently wrote.

Mr Wiles believes investors have got it wrong in their assessment of the timing and size of any rate cuts coming from the Reserve Bank and the implications of those rate cuts for the big banks and their earnings.

He believes the banks’ loan growth will remain modest, margins won’t rebound meaningfully, and costs will remain high for some time.

“In our view, trading multiples now reflect all the potential benefits of a soft landing and a less competitive environment,” Mr Wiles said.

Andrew Triggs from JP Morgan is a bit more positive, although he agrees Australian bank stocks are currently expensive.

“The majors head into 1H24 reporting with decent prospects of holding consensus EPS (earnings per share) at current levels or seeing small BDD-driven (bad and doubtful debt) upgrades,” Mr Triggs said.

Mr Triggs said while the quality of the banks’ loan books is likely to show a gradual deterioration, the loan-loss charges should be contained and unlikely to need any costly top-up provisions.

“We expect dividends to be flat in 1H24 and 2H24 for NAB and Westpac despite the weaker earnings outlook which will likely be offset by higher payout ratios,” he said.

“For ANZ, we expect the dividend will step down meaningfully in 1H24E — on non-recurrence of the ‘top-up’ paid in 2H23 for reduced franking credits attached to each dividend — and then remain flat.”


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