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Interest rate RBA: The ‘good and bad news’ as $1.45 trillion cash record hit

Inflation is easing but David Koch has warned an early rate cut would be proof of Australia’s economic struggle, with more business collapses and job losses.

Cooling inflation has shown encouraging signs Australians won’t cop another interest rate rise, but more “real-life consequences”, such as the collapse of iconic businesses like Godfreys and the job losses that come with it, could be around the corner.

Finance expert David Koch said inflation data for the December quarter came in lower than the markets predicted and indicated the current cash rate of 4.35 per cent was the “peak of official interest rates”.

Does that mean a cut is in store next week? Like the Big Four banks - ANZ, CommBank, Westpac and NAB - Koch doesn’t think the Reserve Bank (RBA) will deliver relief until the second half of the year, meaning mortgage holders will still have to carry the burden of high interest rates for a few months yet.

Interest rates are top of mind for Australian borrowers as inflation drops, but a drop in spend could have dire consequences for businesses and their employees.
Interest rates are top of mind for Australian borrowers as inflation drops, but a drop in spend could have dire consequences for businesses and their employees. (Yahoo Finance Australia/Getty)

“The good news is no more rate increases, the bad news is that we are likely to stay where we are. What you see is what you get until the second half of the year,” he told Yahoo Finance.

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“The Reserve Bank will be ultra cautious just to make sure the genie is well and truly back in the bottle for good and there’s no chance of it coming out again.”

When will interest rates go down?

Economists at the Big Four banks have all made different calls on when rates will be cut but they are in agreement that the central bank will hold the cash rate on Tuesday.

Big Four banks’ predictions:

CBA: Three cuts in 2024 with the first in September

Westpac: Two cuts in 2024 with the first in September

NAB: One cut in 2024 with the first in November

ANZ: One cut in 2024 in fourth quarter

Koch said there was a situation where we could see an earlier rate cut: if the central bank felt it had “overdone it”. However, this may not be the positive turn Australians are hoping for.

“They would be willing to cut if things got bad, and that’s the thing people forget. Everyone says ‘rate cut, rate cut, rate cut’, but they usually come because of a slowing economy, rising unemployment, and businesses going insolvent," he said.

“Rate cuts are to stimulate an economy that’s doing it tough so that’s the flip side of rate cuts. Yes, rate cuts are great, but that means the economy is not so good.”

Borrowers still have some negotiating power when it comes to mortgage repayments.

"There are still so many people out there who have no idea what home loan rate they are paying. Check what rate you are paying and if it's got a 7 in front of it, you're an absolute mug," the Compare the Market economic director said.

With "reasonable equity", Koch said borrowers should be able to get on an interest rate between 5.95 and 6.1 per cent.

Plunge in retail could push more businesses over the edge

A record $1.45 trillion was deposited in December, which RateCity said showed Australians were “building their war chests”, saving instead of spending. That’s backed by a record drop in retail spending in December.

Australians pulling back on spending is a good sign for the RBA, but Koch reminded there were also consequences, and businesses (and their staff) may be the ones paying the ultimate price.

“There was a bigger-than-expected drop in retail sales and Godfreys went into voluntary administration. That’s the real-life part of it," he said. "When consumers stop spending, it puts pressure on a lot of businesses and that can lead to administrations and insolvencies."

The RBA is due to meet next week and we will get a cash rate decision on Tuesday.

Economic snapshot

Inflation: Consumer price index hit two-year low of 4.1 per cent, lower than 4.5 per cent predicted

RBA: Inflation target between 2 and 3 per cent, set to hold cash rate in February

What’s not coming down? Rent, insurance and electricity

What’s the government say? "Encouraging" but not "mission accomplished". Subsidies for child care, rent and power bills helped

Jobs: 65,000 shed in December but steady unemployment rate of 3.9 per cent

Spending: Retail plunged 2.7 per cent in December, biggest monthly decline since 2020 lockdowns

Savings: Record high of $1.45 trillion deposited in December

Market: ASX hit new record high, jumping 80.5 points, or 1.1 per cent

What’s it all mean? Australians are under financial pressure but that’s the RBA’s intention and its strategy to bring down inflation. Lower inflation means lower interest rates. Economists are saying the right numbers appear to be trending down, but now it's a waiting game.

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