Economic and Financial Market Update: The lower cash rate in Australia

Summary:

• The Australian cash rate is likely to peak below that of most peer countries;
• This is unusual in a historical context;
• High household debt at a time of negative real disposable income growth are the most likely cause;
• There is likely to be an improvement in consumers’ real disposable income growth over the next year;
• What households do with that extra income will play a big role in the economic outlook.

The peak in the Australian cash rate will be lower than in peer countries

Ever since thoughts first turned to rate hikes at the beginning of 2022, financial markets have believed that the peak in Australia’s cash rate would be below that of the US. That has also been the case for financial markets views about the peak in the cash rate relative to New Zealand. Expectations that Australia’s peak cash rate would be below that of the UK and Canada though is something that has only happened this year.

Historically Australia having a lower cash rate than the US is not typical but is also not unusual. The Australian cash rate was higher around the turn of the century at a time when the US economy was feeling the fallout from the equity market ‘Tech Crash’. It was again lower prior to the pandemic when the Australian economy was still feeling the pinch of the end of the mining boom and the US economy was powering ahead boosted by fiscal policy.

To read my full update, click here.

We live in interesting times.

Regards,

Peter Munckton - Chief Economist