Interest Rate Cuts: What could spoil the party?

The outlook for interest rates continues to create anticipation in the market.
But what could derail the potential for a thriving property market?

Here’s a quick breakdown of key points shaping the landscape:

WHAT’S SHAPING THE LANDSCAPE?

• Interest Rate Cuts on the Horizon: The money market is still pricing in interest rate cuts throughout the year, setting expectations for a softer monetary policy.
• Bank Predictions: Banks are forecasting the cash rate to fall to between 3.35% and 3.85% once the cuts are implemented.
• RBA Concerns: The Reserve Bank of Australia (RBA) has identified inflation and a tight labour market as its primary concerns moving forward.
• The Risk of “Big Government”: As inflation remains sticky and the labour market stays tight, “big government” could be the factor that disrupts the anticipated rate cuts and economic recovery.
• Global Uncertainty and Stock Market Volatility: Tariffs and general global uncertainty continue to weigh heavily on stock markets, adding to market instability.
• Property Market Dynamics in Perth: Perth’s clearance rates have dropped to 45%, with the average days on market increasing from 8 to 15 days, indicating a slower property market.

The above graph is the Money market’s priced in expectations for the official cash rate in the coming months. It predicts a drop of 25bp in May or June, followed by another in September, October or November, to a cash rate of 3.6% in 2025, with another 25bp partially factored in for 1st half of 2026.

WHAT ARE BANKS PREDICTING FOR INTEREST RATES?

The predictions are in, and the banks have spoken. ANZ forecasts just one more rate cut in August, bringing the cash rate down to 3.85%.

Meanwhile, CBA, NAB, and Westpac are al predicting a cut every quarter, potentialy bringing the cash rate to 3.35% by the end of the year. But what does the Reserve Bank think? Their next big decision is on April 1.

In its decision to cut rates last month, the RBA cited a 3.2% underlying inflation rate for the December quarter, which has eased quicker than expected. With inflation dropping and the cash rate sti l deemed restrictive, the RBA felt comfortable cutting rates by 25 basis points. However, they remain cautious, noting that recent labour market data has shown unexpectedly strong results. This suggests that the labour market could be tighter than previously anticipated.

So, why is the labour market tight despite a weak economy and high migration? According to a report in the Financial Review, three out of every four new jobs created over the past three years have been in the public sector. This explains the ongoing tightness in the job market.

From a property perspective, there are two key factors that could prevent further rate cuts: sticky inflation and a tight labour market. Inflation is driven by the balance between money creation and goods/services production. If the government continues its deficit spending and expands its bureaucracy, it could lead to renewed inflation and a persistently tight labour market. And remember, bureaucrats don’t create goods or services—leading to a decline in per-capita productivity.

In short, big government remains one of the biggest hurdles to further interest rate cuts, and could prevent the property market from seeing the growth we’re hoping for this year