The Reserve Bank of Australia (RBA) held its seventh meeting of 2024, leaving the official cash rate at 4.35%.
Momentum changes quickly: Inflation is subsiding but inconsistent. Employment numbers jumped by circa 64,000 in September from August – higher than the expected gain of 25,000 keeping the unemployment rate at a lower than expected 4.1%.
Consumer confidence is showing signs of life and balance sheets are pretty strong overall. People are saving and electing not to spend, which is good (resilience) and bad (low growth) for the broader economy.
For those leading a chorus for lower interest rates, Governments worldwide are not helping with their excessive spending. With the amount of debt they will need to issue and roll over, this has and will put upward pressure on market interest rates – see below.
Locally, many do not appreciate that higher global borrowing costs impact on the RBA’s ability to cut rates.
Factors Driving Predictions
Several key factors are shaping economists’ views on the RBA’s decisions:
- Inflation Trends: Inflation remains stubbornly high, with underlying inflation at 3.9% in the June quarter of 2024. Westpac’s Luci Ellis emphasised that the RBA’s priority is to bring inflation back to the target range, although she acknowledged that achieving this might take until 2026(Westpac IQ).
- Labour Market: Despite a softening in labour market conditions, the unemployment rate remains low at 4.2%, contributing to wage growth. This tight labour market is delaying any significant rate cuts as inflationary pressures linger(Reserve Bank of Australia)(The Urban Developer).
- Global Economic Conditions: Westpac analysts highlighted the uncertainty in the global economy, particularly the effects of China’s economic slowdown. This has complicated the RBA’s task as it tries to balance domestic inflation control with global volatility(Savings.com.au).
Economic Context
Australia’s economic landscape presents a mix of weak growth and strong housing prices. While household consumption has weakened due to rising interest rates and inflation, housing prices have continued to rise despite these headwinds. Eleanor Creagh, Senior Economist at PropTrack, explained, “While the labour market has softened, home prices remain resilient, with national home prices hitting a fresh record in August”(The Urban Developer). This divergence between the housing market and broader economic indicators has led to mixed predictions about the RBA’s future moves.
Financial conditions in Australia are restrictive but have eased slightly compared to previous assessments. Declines in policy rate expectations and bond yields support this view, and higher housing prices are boosting household wealth (Australian Broker News) (The Daily Aus).
What This Means for Homeowners
For homeowners, the RBA’s decision to hold the cash rate provides some stability, but it offers little immediate relief for those experiencing mortgage stress. Tim Lawless, CoreLogic’s Research Director, pointed out, “The RBA’s decision is positive in that it signals inflation is on a gradual downward trend, but high rates will likely remain in place through 2024”(The Urban Developer). This sentiment was echoed by Michael Yardney, who suggested that any rate cuts are unlikely until 2025, meaning mortgage holders should prepare for higher repayments in the near term(finder.com.au).
RBA Positioning
With a pause at the September 2024 meeting, the RBA commentary again highlights its commitment to the cause. “In year-ended terms, underlying inflation has been above the midpoint of the target for 11 consecutive quarters and has fallen very little over the past year.”
And on the wider world; “There also remains a high level of uncertainty about the outlook abroad. Some central banks have eased policy, although they note that they are removing only some restrictiveness and remain alert to risks on both sides, namely weaker labour markets and stronger inflation.”
It is not likely that the US decision to drop interest rates by 50 points will influence the RBA’s policy direction. Whilst the US was influenced by employment trends, the RBA message emphasises that a different path to achieving strong employment is via price stability. The Government is not happy.
Direction for Local Interest Rates?
Did we say markets settled last month? The market has almost totally wiped out the expected big fall in rates priced in over the next year.
As a result, the graph remains a higher for longer one for the ASX Cash Rate Futures.
Ironic that markets have been up and down despite a year of no movement in the official cash rate. However, watch this space after the US elections are wrapped up.
Interest Rates Worldwide
The story of central banks worldwide is mainly on easing rates. This was led by NZ and Canada with strong moves. These economies are trying to deliver a “soft landing” and Australia is looking like an outlier in some respects. Perhaps time will judge them favourably.
New Zealand’s cash rate was crunched another 50 points down to 4.75%. The baseball bat approach of policy makers continues on an economy that looks a little fragile quite quickly. It is possible that we’ll see another 50 points when they meet again this month.
The U.S. are expecting a cut of 0.25% at the pending November meeting but the market and election is clouding things. Headline inflation is drifting down though employment data is still strong. Bond Yields are active on the back of election fever, and the yield curve is looking more normal as short-term rates fall, and yields rise over the longer terms out to 10 years.
In the UK, The Bank of England is at 5.00% and meets this week after holding last time round. A steady flow of cuts had been anticipated from here, but a high spending Government budget has the potential to complicate the path for the Bank of England to cut interest rates.
Canada delivered a 50-point rate cut in October to 3.75%, stating that its fight with inflation is almost over. The easing is a proactive effort to provide a softer landing for a Canadian economy that is feeling vulnerable.
Central Bank Cash Rates
Before posting any changes today we compare central bank cash rates and their longer term 10-year bond yields.
Yield curves are becoming more normal as cash rates fall, but long term rates increase. There is still red ink but the spread is now much narrower.
| Country | Cash Rate | 10 Year Bond | Spread |
| Australia | 4.35% | 4.56% | 0.21% |
| Canada | 3.75% | 3.29% | -0.46% |
| China | 3.10% | 2.13% | -0.97% |
| Germany | 3.40% | 2.41% | -0.99% |
| India | 6.50% | 6.84% | 0.34% |
| Japan | 0.25% | 0.95% | 0.70% |
| New Zealand | 4.75% | 4.49% | -0.26% |
| Singapore | 3.16% | 2.86% | -0.30% |
| UK | 5.00% | 4.39% | -0.61% |
| USA | 5.00% | 4.46% | -0.54% |
| Average | 3.93% | 3.64% | -0.29% |
In the US, yields on 10-year US Treasuries have risen by 70 basis points since their first 50-point interest rate cut in September. What is going on? It’s election time and investors are growing increasingly concerned that a Trump win will deliver his policies that are seen as inflationary. Tax cuts & tariffs can push up prices.
Local Money Markets
Australia’s longer-term interest rates have a strong correlation with equivalent US yields, so it was no surprise to see our yields up dramatically. Australia wipes out its inverted yield curve with the reality of the market deferring the likelihood of near term rate drops.
| Month | Cash Rate | 180 Day | 10 Year |
| Nov 23 | 4.35% | 4.73% | 4.72% |
| Dec 23 | 4.35% | 4.58% | 4.49% |
| Feb 24 | 4.35% | 4.43% | 4.02% |
| Mar 24 | 4.35% | 4.49% | 4.02% |
| May 24 | 4.35% | 4.68% | 4.51% |
| June 24 | 4.35% | 4.60% | 4.28% |
| Aug 24 | 4.35% | 4.58% | 3.90% |
| Sep 24 | 4.35% | 4.58% | 3.87% |
| Nov 24 | 4.35% | 4.64% | 4.55% |
| Annual Trend | +0.00% | -0.09% | -0.17% |
A month or so is along time in markets. Did we say last time that yields peaked in this cycle? Well that was a false dawn as the 10-year rate climbed dramatically.
Residential Property Performance
The latest residential monthly property results from CoreLogic (see table below) showed a small increase to both Capitals and Regionals during October respectively.
| Location | Month | Quarter | Annual |
| Adelaide | 1.1% | 3.7% | 15.0% |
| Brisbane | 0.7% | 2.4% | 13.0% |
| Hobart | 0.8% | -0.1% | -1.2% |
| Melbourne | -0.2% | -0.8% | -1.9% |
| Sydney | -0.1% | 0.1% | 3.7% |
| Perth | 1.4% | 4.1% | 22.6% |
| All Capitals | 0.2% | 0.8% | 5.9% |
| All Regionals | 0.6% | 1.1% | 6.3% |
Slowing Momentum
The number of listings has increased materially since the end of winter across all the combined capitals. Seasonal yes, but a sign of vendors looking to take some profits or otherwise exit high holding costs.
Gross rental yields are down a little at 3.47% across the combined capitals.
Commercial Property
Other property categories need a much deeper dive. At the top end, we are seeing the impact of the last few years flow through to valuations. For example, the value of Walker Group’s investment portfolio fell around 8% over the 2024 financial year along with other comparable property groups.
At the lower end, there is still a lot of activity. One of the opportunities for buyers is in the acquisition of office or retail properties, where the building value as a proportion of total valuation is high. The option creates itself as the opportunity cost of building and developing is so high.
Currency Wrap-Up
The Australian dollar was much weaker this month, with red ink everywhere except Japan & NZ.
There is some surprise to this, but with the sell-off in US bond markets, along with the prospects of higher interest rates for longer there was a flight to stronger currencies.
The Aussie has declined despite a higher for longer interest rate environment in Australia.
Some content from this blog post was originally published on MCP Group’s blog. You can read the full post HERE
Some content from this blog post was originally published on Craggle’s blog. You can read the full post HERE