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Sluggish GDP growth could trigger 3Q23 rate cuts

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By Charbel Kadib
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3 minute read

The Reserve Bank could commence a monetary policy easing cycle by the end of the year in response to laggard GDP growth and sharper property price falls, according to a senior economist.  

Since May 2022, the Reserve Bank of Australia (RBA) has actioned eight hikes to the cash rate, which hit 3.1 per cent in December.

The market is forecasting at least two additional rate rises in the coming months, with some analysts expecting the cash rate to peak at 4 per cent.  

The monetary policy tightening cycle aims to counter high levels of inflation, which the RBA acknowledges remains “too high”.

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But according to Robert Carnell, NG Economics’ regional head of research, Asia Pacific, the RBA could reverse its monetary policy strategy by the end of 2023.

This, he said, would come against the backdrop of sluggish GDP growth, which he expects to fall to a “sub-2 per cent pace” in 2023.

“The household sector is running out of room to keep spending growing in the face of higher inflation and much more subdued nominal wage growth,” he observed.

“Households are also running out of room to smooth spending by reducing savings, as savings rates have already fallen sharply from their pandemic peaks and the falling values of real assets (property) will also weigh on their balance sheets.

“Large discrete mortgage resets will probably not do too much damage, as many households are already making overpayments, but this will cause problems for some.”

Weakness in GDP growth, Mr Carnell added, would also coincide with sharper falls in Australian dwelling values, tipped to drop 7.3 per cent over the course of 2023.

“Prices should stabilise by the end of 2023, but it may be closer to the end of 2024 before house prices are recording positive year-over-year growth rates again,” he added.

As a result of these headwinds, Carnell is expecting the cash rate to peak at 3.6 per cent, with potential reductions before the end of the year.

“This forecast derives from our assumptions of more slowdowns in GDP growth, further declines in consumer price inflation, worsening negative house price growth, and the discrete impacts of rate hikes on mortgage payments,” he said.

“Rates ending the year lower than their forecast peak will lessen the subsequent reset impact in early 2024 and sow the seeds for a broader recovery.”

Mr Carnell is projecting cumulative reductions of 50 basis points by the end of 2023, followed by additional cuts in the first quarter of 2024.