As expected, the Fed’s decision to cut rates late last week buoyed US and local sentiment as investors took the opportunity to look for higher-yielding assets.
The Australian sharemarket managed to close the week in record-breaking territory with the ASX 200 closing 0.2 per cent higher, with eight of the 11 industry sectors lifting.
The consumer discretionary sector had one of the strongest gains.
The Aussie dollar was up as the greenback slumped.
But beyond the initial sugar hit, the big question is, will the RBA follow the US Fed and cut rates?
The context
The RBA has been under pressure to cut rates as Australians grapple with high interest rates and reduced discretionary spending.
But if you’re a homeowner with a mortgage don’t expect any joy in the near term.
Here’s why.
Ever since dramatic spending measures were flushed through the system during Covid-19, Australia has been dealing with extraordinary inflationary pressures.
RBA Governor Michele Bullock has continually stated during her tenure the need for a deliberate and concerted strategy to tackle inflation.
With a strong Australian labour market and inflation still uncomfortably high, the business case for a rate cut in the near future would appear a long shot.
And if you’re thinking that it automatically follows that we mirror the US, you’d better keep looking.
Recent history shows that the Reserve Bank’s decisions have continuously lagged the Fed over the past couple of years.
When the US first lifted rates, the RBA didn't follow suit until May 2022, two months after the US.
If decisions are to continue on this trend, a cut later rather than sooner would appear more likely.
But interest rates in Australia are so high
There’s no doubt that all mortgage holders are feeling the pinch.
But even with the rate cut in the US, interest rates are still higher there than here in Australia.
The view that Australia is under pressure to cut quickly or even follow suit is perhaps more perception based than evidence based.
Relief is in sight
Financial markets in Australia have put the chance of a rate cut decision by the end of the year at 72 percent.
Early 2025 appears our best chance with experts looking to February for the first signs of rate relief, with the possibility of four cuts priced in by the end of next year.
It might not be as soon as mortgage holders want, but until inflation and the job market eases, the RBA looks unlikely to bow to public and political pressure.
After all, the decision will be based on numbers, not emotions.