Faced with multiple crises, when will the Federal Reserve of Australia cut interest rates?

The Australian economy is facing multiple challenges, and by the end of 2023, it has fallen to the brink, with almost only population growth supporting economic development. This increases the risk that the Reserve Bank of Australia may start lowering policy interest rates earlier than other central banks to maintain the stability of the Australian dollar under pressure.

Firstly, the real problem behind it is household consumption expenditure. Household consumption accounts for the largest part of the economy, exceeding 50%. Despite a decrease of 0.21% in the third quarter, household consumption expenditure increased by 0.09%. However, this growth is mainly concentrated in basic goods and services, masking a further decline in discretionary spending. The report states that the growth in basic expenditures is mainly driven by expenditures on food, electricity, natural gas, and other fuels, due to higher than average weather in the fourth quarter of last year, leading to an increase in demand for refrigeration. Food expenses and hotel, caf é, and restaurant expenses decreased by 2.8%, indicating that family dining out has replaced cooking at home. However, the population increased by 0.5% this quarter, but per capita consumption decreased by 0.4%.

Secondly, the cost of producing goods and services increases with the increase of actual labor costs. The labor cost increased by 3.7% year-on-year, which means that the cost of producing the same quantity is higher. In addition, household savings have unexpectedly increased for the first time, which may contribute to a rebound in future household spending. These factors will make it difficult for the Australian central bank to turn to interest rate cuts in the short term unless the economy continues to weaken.

Furthermore, Australia's GDP growth is not optimistic. The latest data shows that the Reserve Bank has significantly slowed down economic growth, resulting in the Australian economy experiencing the first full year of GDP growth solely due to population growth in 40 years. In 2023, Australia's production only increased by 2.0% compared to 2022, making it the worst year since the pandemic and the fourth time since the economic recession in the 1990s that production growth was less than 2%.

The only reason people truly care about GDP is the connection between growth and unemployment. From a historical perspective, Australia needs a GDP growth of approximately 2.5% to maintain a stable unemployment rate. It is not surprising that the unemployment rate rose from 3.5% in December 2022 to 3.9% in December 2023, with a growth rate of 1.5%.

Currently, improving productivity is a necessary condition. For the Federal Reserve of Australia, although there is evidence that rising borrowing costs are weakening demand, challenges still exist while maintaining an inflation target of around 2.5%. The per capita GDP decreased by 0.3% this quarter, indicating a sustained weakness in productivity. In order to maintain inflation stability and economic expansion, productivity growth is a necessary condition to prevent bottlenecks and delays. In the past decade, Australia's record in this area has not been good, especially after the end of the pandemic, productivity has declined.

For the Australian dollar, details indicate that there is an increasing risk that the Bank of Australia may abandon its tightening tendencies, indicating the possibility of further interest rate hikes. Considering the structure of the Australian mortgage market, where most of the borrowing is priced at overnight rates, abandoning the tightening trend may soon lead to potential interest rate cuts. If we take history as a lesson, when the previous interest rate hikes truly began to suppress the economy, the rate hikes may come quickly.

In short, the global trend of interest rate cuts has begun to emerge. Although there are differences between each economy, considering the highly correlated liquidity and costs between Australia and Western economies such as the UK and the US, it is highly likely that the Federal Reserve of Australia will follow this trend. In addition, the upcoming rising unemployment rate and the already bottomed out household savings in Australia, coupled with the 2.3 million households already hovering above the subsistence line, will be turning points for the Federal Reserve's monetary policy. The current question is no longer whether there will be a rate cut in 2024, but when it will start.