Your chances of a September rate cut just halved

Market expectations of a rate cut later this month have dropped from 26% to 14% in just two weeks.

The Australian Stock Exchange shows the already slim likelihood of a rate cut at the end of the month is now significantly lower that it was.

While expectations sat at 26% at the end of August, the release of June quarter gross domestic product data has sent them plummeting. 

Excluding Covid, the data confirmed 2024-25 was the weakest financial year for growth in Australia since the early 1990s. This came in spite of a small bounce back, thanks to a jump in household spending.

The data showed Aussies upped their discretionary spending between April and June, increasing money spent on hotels, cafes and restaurants, as well as public transport.

While the Reserve Bank has been anticipating an uptick in consumption off the back of the first three rate cuts, the June quarter data – which came after just two cuts – showed overall economic growth was now 0.2% higher than the bank’s forecasts.

In further worrying signs for a September cut, the latest inflation data also painted a similar picture. Australia’s Consumer Price Index for July came in above expectations and at its highest level in 12 months.

Trimmed mean inflation, which the bank uses to consider what to do with the cash rate, also jumped to hit 2.7%.

Alongside spending and inflation, downwards pressure is expected on the Australian dollar if interest rates are cut in the US next week.

The US has been the outlier among major central banks this year, tipped to finally begin a rate cutting cycle while other comparable economies come to the end of theirs.

Webull Securities Australia chief executive Rob Talevski said the Reserve Bank would need to keep a close eye on where the US was headed and how it would impact possibilities domestically.

The cash rate is still sitting at 4.38% in the US though it is widely anticipated a 0.25% cut next week – the first of the year – will lower it slightly.

“Australian investors and the Reserve Bank share the same concern – while local monetary policy settings and economic conditions have little bearing on the rest of the world, those same US dynamics have a significant bearing on Australia’s economy and listed markets,” Mr Tavleski said.

“Further cuts deemed to be unnecessary could feed into the RBA’s concerns over importing inflation from the US, where a double-whammy of trade tariffs and lower interest rates could add on costs to Australian imports.”

These factors could lead to fewer chances of rate cuts in Australia, marking a disappointing end to the year that was anticipated to hold five or more cuts for households.

The Reserve Bank will make its next decision on 30 September.

This article first appeared on Mortgage Choice and has been republished with permission.

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