Why do we keep expecting rate cuts, even when the RBA tells us not to?
At the time, mortgage holders had endured 13 interest rate hikes since May 2022, and the cash rate had sat at 4.35 per cent since November 2023. Even though the February rate cut was 'just' 0.25 per cent, it was welcome.
To many – economists and financial experts, in particular – it was also a sign of things to come. When another rate cut followed in May, it all but confirmed the belief that a steady trimming of rates lay ahead, and indeed, going into last week's RBA meeting, the financial market was giving a 96 per cent chance of another cut.
As we all know, that didn't happen, and many people – especially those who were predicting a cut – were very unhappy. While the disappointment was understandable, I found the shock that poured out after the announcement frankly baffling.
At the February press conference by Governor Michele Bullock after the first interest rate cut in almost two years was announced, someone asked if Australian households could expect consecutive cuts throughout the rest of the year. If you rewind and look at what she said, it's clear the governor warned us all – pretty strongly – that we shouldn't get our hopes up.
She called the prospect of consecutive cuts 'unrealistic', and added that 'the market is expecting quite a few more interest rate cuts by the middle of next year; about three more on top of this. Whether or not that eventuates is going to depend very much on the data – our feeling at the moment is that that is far too confident'.
When suddenly our rate cut daydream was no longer on the table, people understandably were pretty unhappy.
As if that were not clear enough, Bullock added: 'I want to be clear that today's decision does not imply that further rate cuts along the lines suggested by the market are coming'. She also said: 'We have to be careful not to get ahead of ourselves'.
There are some very valid reasons for why experts were caught off guard by last week's decision (namely, the jobs figures, which many now see as proof the decision by the RBA and Bullock was wrong).
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