Economist tips rate cut by mid-2024

In a recent NAB Broker webinar, Alan Oster, the chief economist of National Australia Bank (NAB) predicted that interest rates would decrease by the middle of 2024, citing the expected decline in inflation.

The Reserve Bank of Australia (RBA) has been actively monitoring inflation levels, aiming to bring them back within the target range of 2–3 per cent using the cash rate as its primary tool.

“We would say when [we] get the CPI next week for the year to June, it’ll likely be around 6 per cent, maybe around 4 per cent by the end of the year and back to 3 per cent by the end of 2024,” Mr Oster said.

Indeed, this is a more optimistic outlook than the RBA, which has flagged inflation would return “to the top of the target band in mid-2025”.

Mr Oster also noted that the RBA has begun expressing concerns about the economy in recent months.

Speaking during an address to the Economic Society of Australia, the Reserve Bank governor Philip Lowe also noted its decision to maintain the cash rate target at 4.1 per cent was aimed at assessing the impact on the economy.

“The slow growth in demand is expected to lead to some rise in unemployment and a moderation in growth in unit labour costs. It is also expected to reduce cost pressures on firms and to lead to greater discounting than has been the case over recent times,” Mr Lowe said.

Mr Oster expressed concerns about the consumer noting the unemployment rate was rising, the impact of fixed-rate loans rolling off, and consumer spending patterns.

Mr Oster highlighted the large loan maturities, reaching approximately $50 billion, will peak in the coming months as borrowers transition from interest rates of around 2 per cent to around 6 per cent, taking their monthly income down by an estimated $1,700 to $2,000.

He also expressed concerns about business investment and projected a modest recovery of around 5 per cent in house prices over the next 12 months.

While the labour market currently shows strong employment growth, he anticipates a gradual increase in the unemployment rate to slightly above 4 per cent by the middle of next year and 5 per cent by 2025.

He also noted that consumer spending in June experienced negative trends following a relatively stable May and April.

While there are few substitutes for essentials such as rent, utilities, and mortgages, Mr Oster said that consumers are prioritising things that they value.

Instead, consumers have become more selective in their expenditures, prioritising the things they value. For instance, consumers continue to travel but spend less, particularly in hospitality venues, to manage the growing costs of living.

Meanwhile, NAB has recently updated its terminal rate forecasts, now expecting the RBA’s tightening cycle to peak at 4.6 per cent, noting that “recessionary forces” are gathering.

[Related: Major banks agree cash rate peak is 4.6 per cent]