To The Moon

Michele Bullock, The RBA governor

As the U.S. Federal Reserve moves closer to cutting interest rates, Australian borrowers might wonder what this means for them. Historically, economic moves in the U.S. tend to ripple across the globe, influencing policies in nations like Australia. While U.S. Fed Chair Jerome Powell signals rate cuts aimed at easing inflation and stimulating the economy, Australians hoping for similar relief might be disappointed. The Reserve Bank of Australia (RBA), led by Governor Michele Bullock, has made it clear that rate cuts are unlikely in the near future.

The Global Trend of Rate Cuts

The U.S. is poised to join other major economies, including the UK, Canada, China, and New Zealand, in reducing interest rates. These cuts reflect a global trend toward easing monetary policy, as many countries attempt to combat slowing growth and easing inflation. Powell's comments on the rise and fall of inflation are echoed in Australia's economic narrative. Both countries saw inflation surge post-COVID due to supply chain disruptions and increased consumer demand, exacerbated by the Russia-Ukraine war, which further pushed up energy and food prices.

However, as inflation begins to fall in both economies, largely due to aggressive rate hikes and normalization in supply chains, central banks are adopting a more cautious approach. In the U.S., markets are already pricing in several rate cuts by year-end. Yet in Australia, the story is different. The RBA remains firm that inflation is still too high, and despite the global shift, Australia is not yet ready to follow suit with rate cuts.

RBA’s Stance: No Immediate Relief

Michele Bullock’s recent statements emphasize that a rate cut in Australia is unlikely anytime soon. While many Australians are feeling the pinch of high mortgage repayments, and some are even being forced to sell their homes, the RBA remains focused on controlling inflation. Bullock has acknowledged the economic challenges facing borrowers but insists that cutting rates prematurely could reignite inflation, which would worsen the situation in the long term.

Australia, like the U.S., has seen restrained inflation expectations, which has helped prevent a wage-price spiral that could have pushed inflation even higher. Still, Bullock warns that the RBA’s job is far from over. With a significant portion of the economy still “running hot,” the central bank is committed to maintaining its current course until inflation is firmly within its target range of 2-3%.

The Impact on Borrowers and Investors

For Australian borrowers, this means that mortgage relief may not be around the corner. Homeowners on variable-rate loans, in particular, will continue to feel the squeeze, especially those whose incomes are failing to keep pace with their repayments. Bullock’s recent estimate that around 5% of owner-occupiers with variable-rate mortgages are already in financial distress underscores the severity of the situation. These households have resorted to cutting back on essentials, dipping into savings, or taking on additional work. Some may be forced to make the tough decision to sell their homes.

Investors, on the other hand, might take a more optimistic view. While borrowing costs remain high, the broader Australian economy has shown resilience, particularly in the labour market. Investor housing loans rose by 5.4% in July 2024, and new loan commitments remain significantly higher compared to the previous year. As long as inflation continues its downward trend, markets could eventually anticipate rate cuts, potentially boosting both housing and stock markets.

Should Australians Expect a Shift in Investing Trends?

For investors, the global move toward lower interest rates could present opportunities. Even if Australia does not follow the U.S. immediately, the anticipation of future cuts might lead to bullish sentiment in sectors like real estate and equities. A rate cut in the U.S. could spur risk appetite, leading Australian investors to consider growth stocks, real estate, or other assets that benefit from lower borrowing costs.

However, for now, caution remains the watchword. The RBA’s stance suggests that investors should prepare for a period of sustained higher rates. Those investing in sectors sensitive to interest rates, like housing or consumer goods, should remain vigilant. On the other hand, investors may find opportunities in defensive stocks or sectors like utilities and healthcare, which tend to perform well in high-rate environments.

Conclusion: No Immediate Relief, but the Tide May Turn

While the U.S. Fed is on the verge of cutting rates, Australia’s central bank is taking a more conservative approach. For Australian borrowers, the promise of relief remains distant, as the RBA focuses on ensuring inflation is brought under control. Investors, however, may see opportunities as the global rate-cutting trend unfolds, though any significant shift in Australian monetary policy remains unlikely in the near term. For now, Australians must brace for continued economic pressures while keeping an eye on potential shifts down the road.

@TigerWire