Interest Rates: Why Major Banks Are Shifting Their Forecasts
A majority of Australia’s four major banks now anticipate the cash rate will remain steady for the remainder of 2024 before moving toward cuts by mid-2027. While ANZ, Commonwealth Bank, and NAB have shifted their outlooks to reflect a cooling interest rate environment, Westpac remains an outlier, maintaining a prediction of further hikes in August and September 2024 with no rate relief until 2028, according to recent economic briefings.
Why are economists changing their interest rate predictions?
The pivot among major lenders stems from evidence that current monetary policy is successfully curbing inflation. According to HSBC economist Paul Bloxham, the Reserve Bank of Australia’s (RBA) previous actions are effectively cooling the economy. While Bloxham warns that inflation may rise slightly in the short term, he expects the RBA to remain on hold in June, citing a weakening in economic growth as the primary driver for future rate stability.
How do bank forecasts compare?
The divergence between banking institutions highlights the uncertainty currently facing the Australian financial sector. ANZ has updated its position to project two cash rate cuts by 2027, a significant shift from its previous forecast of steady rates. In contrast, Westpac chief economist Luci Ellis maintains a more cautious stance, projecting inflation will peak at 4.7% late this year. This expectation of higher, more persistent inflation leads Westpac to predict a more aggressive path of rate hikes compared to its peers.
| Bank | Outlook |
|---|---|
| ANZ | Two cuts in 2027 |
| Commonwealth Bank | Two cuts in mid-2027 |
| Westpac | Hikes in 2024; no cuts until 2028 |
What are the risks to the current economic outlook?
Financial markets remain at odds with the majority of bank economists. While banks are pricing in a period of stability followed by relief, market data suggests a higher probability of an interest rate hike within the next 12 months. This friction occurs because markets react to immediate volatility, whereas bank economists like those at NAB and Commonwealth Bank focus on long-term trajectory and the RBA’s stated inflation targets.
Frequently Asked Questions
- Will interest rates rise again this year? Westpac predicts hikes in August and September 2024, though most other major banks expect the RBA to remain on hold.
- When do most banks expect rates to start falling? ANZ, Commonwealth Bank, and NAB generally point toward mid-to-late 2027 for the commencement of rate cuts.
- Why does Westpac have a different view? Westpac’s chief economist, Luci Ellis, expects inflation to peak at a higher level (4.7%) than the RBA’s current forecasts, necessitating a tighter monetary policy.
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