Australian households are going to get interest rate cuts sooner rather than later.
Here are my five reasons why.
First, the Fed is going to cut soon:
Our BofA US Economics team’s outlook for monetary policy includes rate cuts beginning at the March FOMC meeting, with the Fed executing four-25bp rate cuts over the course of the year at the March, June, September, and December meetings, for a total of 100bpin rate cuts in 2024.
We maintain the same quarterly schedule for rate cuts in 2025, bringing the total number of rate cuts to 200bp over the next two years.
We expect a terminal funds rate of about 3.0% to be reached in early 2026. BofA’soutlook for monetary policy also includes an end to QT at mid-year. The Fed has made it clear that balance sheet runoff can extend beyond the first rate cut in an environment where the committee is normalizing its policy stance.
Second, a global energy crash with no end in sight is underway. This comprises all major fuels, including oil, gas and coal.
This will remove one of the two key pillars of Alboflation in H2 ’24 as local gas and electricity prices track global lower.
In due course, it will also take down iron ore.
Which brings me to point three. China is buggered. It is caught in a giant liquidity trap it appears not to understand. The recent response of launching QE to fund public housing construction as a cure for a housing glut and private debt revulsion is absurd.
This will only succeed in crowding out what is left of private demand and accelerate the great property crash.
I do not doubt that China will keep throwing credit at anything that moves, but expanding the supply side into a capital misallocation bust will only create an immense deflationary downdraft that will tip into its increasing competition with developed markets on sophisticated manufactures.
Not to mention falling commodity demand and prices.
Fourth, Australian house prices are sliding again. At the best of times, this kills the consumer. At the worst of times, it will work very quickly to weigh on already anaemic consumption.
Albo has also succeeded in flooding the labour market with cheap foreigners, so wages are about to roll over and unemployment climb as well.
This should also slow rental price growth, the second pillar of Alboflation.
Fifth, there is AI. It is still too early for mass job losses. But the technology is real and experimentation is accelerating fast. I expect to see a big erosion of labour markets within two years.
The RBA will be forced to move soon, and the cuts will keep coming, barring another inflationary global shock such as escalation in the Middle East.
