Reserve Bank poised to reverse its rate ‘mistake’

Australians’ disposable income has finally recovered to where it was before the pandemic and is poised to be buoyed by an interest rate cut as the Reserve Bank makes up for its shock decision last month to deny relief to the nation’s home buyers and businesses.

Financial markets and economists are unanimous in expecting the bank to confirm the third cut in official interest rates this year following a two-day meeting that begins on Monday, delivering a $100 a month saving to Australians with a $600,000 mortgage.

Their belief has not been dampened despite the surprise of the Reserve’s decision in July to keep rates steady after markets put the chance of a cut at 100 per cent. The hold decision was close run, board members supporting the move 6-3 in what was the first ever open split within the bank on rate settings.

Confirming the decision last month, bank governor Michele Bullock said while future interest rate cuts were likely, the issue was a matter of timing as she noted the importance of upcoming June-quarter inflation figures.

The figures showed headline and underlying inflation easing and within the RBA’s 2-3 per cent target band. Headline inflation, at 2.1 per cent, fell to its lowest level since early 2021.

The inflation numbers came after softer-than-expected jobs figures for June, the unemployment rate having risen to a three-year high of 4.3 per cent. Job creation for the past three months has been effectively flat.

CBA senior economist Belinda Allen said a rate cut on Tuesday was a done deal.

She said the economic data – including the quarterly inflation report and last month’s softer-than-expected jobs figures – since the Reserve’s July decision all pointed to a loosening of monetary policy this week.

“The consumer price index, together with the labour force data, reinforce the economy is performing as expected and the RBA monetary policy board should continue their cautious easing cycle in August,” she said.

AMP senior economist Diana Mousina said the expected cut this week should have been delivered last month, noting that there was unlikely to be a split among bank board members on what to do.

“We think the monetary policy board will vote 9-0 to reduce the cash rate by 25 basis points because the inflation data that the board was waiting for last month to confirm its forecasts came in close to expectations,” she said.

“Looking ahead, we expect a total of 100 basis points in this cycle, including one in August. This would mean that the cash rate settles at 2.85 per cent at the end of the cutting cycle.”

One of the concerns of the Reserve Bank has been whether interest rate cuts would fuel a lift in inflation, driven by a step-up in consumer spending.

Research released last week by the ANZ showed that despite rate cuts in February and May, household spending had not materially changed from its levels in late 2024.

Consumers have been crimped by inflation, the burden of personal income tax and higher interest rates which have reduced their disposable income for several years.

But figures released by the OECD show that the worst of the pain is finally over.

Australian household disposable income was among the fastest growing over the past 12 months, rising by 1.8 per cent between the start of 2024 and early this year.

Only Poland, Canada, Britain and the Netherlands enjoyed a bigger lift over the period, while households in nations such as Greece, Chile and Sweden went backwards.

Despite the strong lift for Australia, it only returned the nation’s households to where they were in late 2019, before the pandemic and the post-COVID surge in inflation and interest rates caused economic havoc.

While Australians’ disposable income is back to pre-COVID levels, it is still 6.3 per cent down on the peak enjoyed in early 2022 when official interest rates were still at 0.1 per cent and inflation was starting to rise. Federal government stimulus payments and withdrawals from superannuation accounts also swelled incomes.

Americans’ disposable income has climbed by 6.5 per cent since early 2022, while it has risen by 3.7 per cent for British households.

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