Investors and borrowers have been waiting with bated breath to see when the Reserve Bank of Australia (RBA) will cut the cash rate, however on Tuesday 5th November the RBA’s Governor, Michelle Bullock, announced no change to interest rates. The cash rate has been on hold at 4.35% since November 2023. Click here to see what she had to say
Some hoped a cash rate cut may come after the US Federal Reserve cut interest rates by 0.50 per cent last month, joining other countries like New Zealand, Canada and the UK in giving homeowners a reprieve, however, the RBA Board held firm about the need to maintain a restrictive monetary policy for the time being.
Most economists now believe a rate cut won’t happen until early to mid 2025.
What’s happening with inflation?
Inflation has been trending lower, which is promising.
As of September 2024, Australia’s annual inflation rate was 2.8%, which is the lowest it’s been since the first quarter of 2021. This is a significant decrease from the 3.8% inflation rate in the June quarter (Source: ABS) .
However, the RBA is still waiting for a more sustained drop before cutting the cash rate.
The Governor and the Treasurer have agreed that the appropriate target for monetary policy in Australia is to achieve an inflation rate of 2–3 per cent.
“The board needs to be confident that inflation is moving sustainably towards the [2-3%] target before any decisions are made about a reduction in interest rates,” Governor Michele Bullock said.
So what is keeping Australia’s inflation rate higher than other OECD countries…
Strong employment figures are supporting a steady cash rate as the RBA prioritises economic stability amidst an increasingly robust labour market.
Key Employment Insights for September
- Job Growth: Over 64,000 jobs were added in September, far surpassing the expected 25,000.
- Unemployment: The jobless rate remained steady at 4.1%.
- Participation Rate: Reached a record high of 67.2%, reflecting increased workforce engagement as more Australians are employed or actively seeking work.
How Employment Data Affects Rate Decisions
RBA Governor Michele Bullock has indicated that the current strength in the labour market makes a rate cut unlikely in the near term, despite rate cuts by other global central banks. As a result, market expectations of a rate cut in December have dropped, with the odds now sitting at just one in three—down from a 50% chance prior to the employment data release.
What the Big Four banks are saying
Australia’s Big Four banks agree that rates have peaked, but not all are on the same page as to when the RBA might make its first cash rate cut.
- Commonwealth Bank – CBA has now changed its call on the timing of the first cut to interest rates. Their Chief Economist recently said: We jettisoned that call after the data dropped as the trimmed mean outcome was simply not low enough to see the RBA cut rates this calendar year. Our base case is now for a first cut in the cash rate in February 2024.
- NAB – NAB brought forward its forecast of when the RBA will cut interest rates to February 2025, rather than May next year. It’s anticipating a 0.25 per cent decrease to 4.1 per cent in February, followed by one cut per quarter until the cash rate is 3.1 per cent in early 2026.
- Westpac – Westpac expects the cash rate will remain unchanged until February, which will mark the first of four 0.25 per cent cuts throughout 2025.
- ANZ – ANZ agrees the RBA is likely to start an easing cycle from February 2025.
What does this mean for Investors?
As our rates are aligned to the RBA cash rate, if the RBA does cut interest rates, our distribution rates to our investors will fall as well.
Running through the numbers, a 0.25% pa rate cut would shave $20.83 off the monthly distributions paid on a $100,000 investment @ 8.7% pa*.
Next steps
We leave making forecasts to the Economists and we focus on making sound investment decisions to produce quality returns for our investors.
For a confidential chat to see how the Premium Income Fund could help boost your investment returns, reach out to me 0478413147, I’m happy to answer any questions you may have.
Get in touch today.
Stephen Croll
Investor Relations Manager
(M) 0478413147
(E) Stephen@rhodesam.com.au
Authorised Representative 1298093
Rhodes Asset Management Ltd AFSL 464772 ACN 165 917 813
* Terms & conditions apply. There are two retail investment subclasses in the Premium Income Fund: Enhanced and Standard. The latest annualised distribution rate for Enhanced subclass is 8.70% (minimum investment $100,000); The Standard subclass is 8.20% (minimum investment $20,000); The Wholesale subclass rate is 9.20% p.a. nett of fees and is only available to qualifying wholesale investors, with a minimum investment of $250,000. Please note that past performance is not a reliable indicator of future performance. This investment is not a bank deposit and carries risk. Refer to the product page and PDS for more information. Contact us for further details..
