Can the RBA cut interest rates as soon as Q1 2024?

In the space of under two years, the investor psyche around interest rates has shifted dramatically. Who can forget that infamous line from former RBA Governor Philip Lowe, suggesting (or if you read the tabloid press, recommending) that interest rates probably will not rise until at least 2024. Back then, that's when the Reserve Bank thought that inflation would sustainably be inside (or above) its target band. 

Well, that aged like spilt milk. Interest rates went up nearly two years earlier than predicted, catching a lot of people off-guard (not least the RBA board).

So if the RBA board can be wrong on when interest rates will rise, it stands to reason that the RBA may be wrong on when interest rates will need to be cut. As things stand, the RBA does not expect inflation to be back inside its target range sustainably until the end of 2025. 

The rates market believes the RBA will begin to cut rates at the back end of 2024 or early 2025, suggesting the central bank's pain threshold is a little higher than what it's admitting. 

But AMP has a totally different view - and one that is decidedly at odds with the rest of its peers. AMP's base case is for the RBA to cut interest rates as soon as the first quarter of 2024. 

So why is this? AMP's deputy chief economist and Signal or Noise series regular Diana Mousina thinks the answer is essentially two-fold. 

"It's really around our view that inflation's going to surprise to the downside and that consumers are not as resilient as what most people expect them to be and that the accumulated savings argument is more or less over," Mousina told the audience at Livewire Live recently.

The other big reason is around the roll-over in household savings. While economists normally think of consumers having high 'savings rates', the huge rush in stimulus measures during the pandemic has given rise to a new term - accumulated savings - or what people kept in the bank until they needed to draw down on those resources. And as this chart shows, that roll-over in savings is definitely in motion.

Source: AMP

This excerpt from the Livewire Live panel "Is the party over or has the music just changed?", Mousina explains further her thesis for why rate cuts are coming.

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