Category: Market Outlook

The impact of the budget on macroeconomic conditions is broadly neutral, which was confirmed with the muted reaction in financial markets to the budget. The pre-conditions are in place for the RBA to deliver further interest rate cuts but the timing of the next rate reduction is, at this stage, open.

Despite the RBA commentary, financial markets are continuing to price in further interest rate cuts with a cash rate of approximately 3.40 per cent factored in by the first half of 2026. Softer economic data out of the US in recent weeks has helped reinforce the market pricing for lower interest rates.

The important news in the first month of 2025 centred on a further sharp deceleration in inflation, the full pricing in of a series of interest rates cuts from the RBA and the start of the Trump Presidency in the US.

The other major issue to unfold in Australia is falling house prices at a national level, but it remains the case that market conditions are uneven from city-to-city…

A busy 2024 ended with the RBA holding official interest rates where they started the year – at 4.35 per cent.

The RBA has now held official interest rates steady for more than a year despite the substantial fall in inflation, the weak economy, the slowing in wages growth and the flood of interest rate cuts around the world.

The last month has seen what might be called “green shoots” of an economic recovery in Australia, aided by an easing in cost of living pressures as inflation has retreated towards the RBA target band.
It is important to note that these encouraging signs are from a weak starting point – it is too early to be confident of a meaningful economic recovery, but it is encouraging to see some better news.

In summary, economic growth in the Australian economy remains weak, the unemployment rate is rising, wages growth is slowing and inflation is falling back towards the RBA’s 2 to 3 per cent target. The interest rate hikes since May 2022 are working.

In what could turn out to be an unwelcome tension in the economy, the weak economy continues to underpin a lift in the unemployment rate, while the pace at which the rate of inflation is falling is slower than the RBA would like.

The broad economic themes that kicked off 2024 remain in place, with economic weakness, unemployment moving higher and inflation set to fall to the RBA’s 2 to 3 per cent target.