Economists predict RBA's next rates move will be a cut, but stage 3 tax cuts muddy the timetable

It can now be confidently said there will be no further interest rates pain for households within the current monetary policy cycle, according to senior economists.

The added confidence came as Westpac unveiled an update to its trading performance.

The lender’s unaudited net profit for the three months ending on December 31 was $1.5 billion, down 6 per cent from the quarterly average for the prior six months.

These updates are important for analysts and investors to revisit their valuation spreadsheets and share portfolios, but there’s also new information for bank customers too.

“The economic slowdown, combined with abating inflationary pressures, should provide scope for monetary policy to become less restrictive within the next year,” Westpac CEO Peter King said.

Cutting through the jargon, Mr King says that the next interest rate move by the Reserve Bank will be a cut to the cash rate, rather than a hike.

Westpac chief economist Luci Ellis, a former Reserve Bank official, says the most likely date for the first interest rates cut is September.

“The key reason for our view is that inflation is coming down,” she said.

The Reserve Bank has made its view on the rates outlook clear, saying all options are still on the table in terms of monetary policy decisions.

“We need to make sure that we don’t have to backtrack on inflation, that inflation doesn’t get away,” governor Michele Bullock said at the RBA’s first post-decision press conference earlier this month.

“We do need to make sure we’re making progress and we need to be convinced that progress is going to continue.”

‘Something would have to go very wrong’ 

It’s appropriate that the RBA boss might be cautious, given its data points to the possibility that what are known as “inflation expectations” may not be anchored.

This indicates the inflation fight is not over, as shoppers’ frustration with price hikes makes them eager to buy before prices rise further, potentially cementing upwards pressure on inflation.

But commercial bank economists don’t have the same remit, and can speak based on how they see the economic tea leaves.

“We’ve had the view that the most likely outcome is that there’s enough decline in inflation and enough of a softening in the economy ongoing in the first half of this year to convince the RBA that their forecasts [which currently see inflation back within the target band by 2025] will come true,” Westpac’s Ms Ellis said.

“Something would have to go very wrong with the current inflation trajectory [to see another RBA interest rate hike].”

Deutsche Bank revealed earlier this month it saw the possibility of an RBA interest rate cut as early as May.

But most economists have the Reserve Bank easing policy somewhere between June and December.

One reason for a later-than-expected cut to the cash rate target is the rollout of the federal government’s stage 3 tax cuts.

The ANZ bank does not have the Reserve Bank cutting until November.

“On our estimates [the stage 3 tax cuts] will be the equivalent to around 50 basis points [half a percentage point] of rate cuts in the 2024/25 financial year,” senior economist Catherine Birch said.

“So that should mean that we do see households in a slightly better position, and I guess [that is] one reason why we think the RBA will hold off until they see how things are progressing throughout the year before they actually start to cut rates.”

Independent economist Chris Richardson is one of the more — what they call — “hawkish” economists who does not see the RBA easing monetary policy until December, in part due to the implementation of the stage 3 tax cuts.

“A rule of thumb coming out of economic models would suggest, other things equal, that because we’re getting a big tax cut in the middle of the year and … in terms of its impact on inflation, that’s still there … you will start to see the first interest rate cut in Australia several months later than many other places around the world,” Mr Richardson said.

“Our initial relief as inflation goes down will go to taxpayers, rather than to borrowers.”

Key in the Reserve Bank’s interest rate deliberations will be the release of the ABS’s December quarter Wage Price Index (WPI), expected this Wednesday at 11:30 AEDT.