Commonwealth Bank boss Matt Comyn says the Reserve Bank may not cut interest rates until early 2025 because of “persistent” inflation, compounding cost of living pressures for borrowers counting on tax cuts and mortgage relief.
CBA economists predict the RBA will start reducing rates from September, but Mr Comyn told The Australian Financial Review “there is certainly a possibility that could be delayed” until the new year, after US inflation data came in stronger than forecast.
Financial markets pushed back their own bets of the likely timing of RBA easing to December, from September. Just last week, financial markets had implied two cuts this year but that timeline crumbled after the RBA kept its tightening bias intact.
US inflation fell from 3.4 per cent to 3.1 per cent in the year to January, but economists had predicted it would drop further to 2.9 per cent. Mr Comyn described the inflationary environment as “persistent” as he unveiled CBA’s interim result.
“[Rate cuts] will be data-driven and, clearly, inflation coming down should be the highest priority,” he said. “There is some uncertainty about exactly when rates will come down and what the pace of the reductions might be.”
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A shrinking profit margin overshadowed CBA’s $5 billion first-half result and improved dividend, as its key measure of profitability – or net interest margin – narrowed 6 basis points over the December half to 1.99 per cent under the strain of mortgage competition.
The US inflation data put pressure on global markets. The ASX closed at 7547.7 points, down 0.74 per cent. CBA was down 1.7 per cent to $114.07.
Briefing analysts, CBA chief financial officer Alan Docherty cited the inflation surprise in the US. “It is a very tough time for economic forecasts. As the last 24 hours have taught us, things change quickly,” he said.
Locally, annual inflation slowed from 5.4 per cent in the September quarter to 4.1 per cent in the three months to December. Treasury secretary Steven Kennedy told a Senate committee on Wednesday the figure would remain volatile month-to-month as the pace of inflation slowed even further.
“The echoes of the supply-side shocks are becoming smaller, and economies are transitioning back towards services leading inflation,” Dr Kennedy said.
Services inflation stubborn
“The cycle in prices of services tends to lag and be more persistent, rising more slowly and falling slowly,” he said. “We can see this in a number of countries with core services inflation now being the largest contributor to headline inflation.”
The Australian dollar slumped to a three-month low and bond yields surged after the US inflation data, stoking bets that interest rates would stay higher for longer.
US January CPI up
The shift in pricing followed the release of the US consumer price index, which rose 0.3 per cent in January. The core measure re-accelerated to 0.4 per cent. Both were a tenth above forecasts as services prices lifted the most in almost two years.
The outcome cemented expectations that the US Federal Reserve would stand pat at its March policy meeting. Traders now ascribe only an 8 per cent chance of a move lower.
Fed fund futures imply three rate cuts this year, in line with the Fed’s forecasts. They are fully priced for a move in July. Before the data, traders were betting on four reductions, starting in June.
“The market was getting ahead of itself,” said Schroders head of multi-asset in Australia Sebastian Mullins. “They were a little ahead of themselves here but not as much as the US because the RBA is slightly more behind the curve.”
The Australian dollar recoiled by 1.2 per cent to US64.41¢, the biggest daily drop in four months. It steadied at US64.55¢ in afternoon trading. The $A has shaved off more than US4¢ since late last year, largely because US Treasuries offer more attractive returns than their Australian counterparts.
US Treasury yields soared. The two-year was up 15 basis points to 4.66 per cent and the 10-year jumped 11 basis points to 4.32 per cent. That dragged up Australian bond yields. The two-years surged by 11 basis points to 3.93 per cent and three-years jumped 8 basis points to 3.89 per cent, the highest in a month. Three-year futures leapt 14 basis points to 96.11.
The Reserve Bank has lifted the cash rate 13 times since 2022 to 4.35 per cent to get on top of rampant inflation. Last week, it left the benchmark on hold, noting the progress made on cooling prices, but it said it would lift interest rates again if needed.
UBS macro strategist Giulia Specchia noted the differences in the level of the so-called neutral rate – when monetary policy is neither contractionary nor expansionary – between the US and Australia.
In the US, where the benchmark rate stood at 5.5 per cent, the neutral rate was estimated at 2.5 per cent, or 12 cuts away from reaching neutral, she said. In Australia, the neutral level was about 3.5 per cent, meaning the cash rate was three cuts away from neutral.
“So if the Fed can delay its cutting cycle, then the RBA can definitely delay its cutting cycle because they don’t have as much to do as other central banks,” Mrs Specchia said.
“The market is pricing in the fact that if the Fed cuts less, then the RBA cash rate will stay at this level for longer, perhaps for most of 2024.” UBS expects a rate cut in November.
Western Asset Management head of fixed income Anthony Kirkham said one rate reduction this year was “reasonable”. “It’s either one or two cuts, not three, four or five, like in other markets,” he said.
Unwelcome surprises
Economic data elsewhere has also poured cold water on hopes of imminent rate cuts. In Britain, labour market data was more robust than expected. The jobless rate unexpectedly dipped to 3.8 per cent from 3.9 per cent. Employment as well as wages growth came in higher than expected.
Markets are now predicting a chance of a British rate increase – albeit tiny – in March. They were betting on a small chance of a rate cut on Monday.
In New Zealand, traders are wagering that the nation’s central bank’s next move will be up, even though the central bank thinks inflation will slow to 2.5 per cent in the next two years. Kiwi traders ascribe a 57 per cent chance of a rate increase by May.