Australia and New Zealand: Mid-year macro update

Summary

The Reserve Bank of Australia (RBA) held its policy rate steady at 4.35% this week, while its accompanying statement was generally hawkish in tone. The RBA said inflation remains above target and is proving persistent. At the post-meeting conference, RBA Governor Bullock said policymakers discussed the case for a rate hike, but did not consider a rate cut.

We think a mix of weak growth but elevated inflation data will be firm enough to keep the RBA wary of lowering interest rates prematurely. As a result, we now expect the RBA to hold interest rates steady for all of 2024. As inflation eventually slows we expect the central bank to proceed with a careful and steady monetary easing cycle from early next year. We expect 25 bps rate cuts in February, May, August and November 2025, which would see the policy rate end next year at 3.35%.

In New Zealand, sentiment surveys and activity data have remained weak in early 2024, and we forecast GDP growth of just 0.8% this year. At the same time inflation, and especially domestically oriented inflation, has remained elevated above the central bank's target. Against this backdrop, the Reserve Bank of New Zealand (RBNZ) has maintained a hawkish stance, saying interest rates may need to remain at a restrictive level for longer than previously anticipated.

With inflation trends seemingly dominating the RBNZ's policy outlook, we now expect the central bank to begin lowering interest rates later than previously envisaged. We forecast an initial 25 bps rate cut to 5.25% at the RBNZ's November meeting, although we acknowledge an initial rate cut could come later still. In 2025, we expect the RBNZ to cut rates at a steady 25 bps per quarter pace, and anticipate rate cuts at the February, May, August and November announcements.

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