As of November 2024, the Reserve Bank of Australia (RBA) projects the cash rate to stay at approximately 4.35% until mid-2024, before gradually falling to about 3.2% by mid-2026. However, major banks have differing views on the pace of the rate reduction.

These projections are based on the assumption that the cash rate is nearing its peak in the current cycle and will hold steady at this level until mid-2024. The cash rate outlook is influenced by financial market expectations and a survey of market economists. While high inflation is impacting all households and businesses, the effects of monetary policy tightening vary across different groups.

Our analysis suggests that most of the two-fifths of households with a mortgage are well-positioned to manage the current mortgage rates. Many are responding by cutting back on spending, saving less, or drawing on savings buffers. However, approximately 5% of borrowers are currently struggling to cover both essential expenses and mortgage payments, and are depleting their savings or seeking additional income sources or cost reductions. Some of these borrowers may run out of financial buffers within the next six months, potentially falling behind on mortgage payments. On the other hand, households that are net savers are benefiting from higher returns on their savings due to the higher interest rates.

In addition to the direct effects of higher rates, other aspects of monetary policy are helping to slow demand growth and contribute to the reduction in inflation. This includes increased incentives to save and a positive impact on the value of the Australian dollar.

Employment Outlook
Employment is expected to continue growing, but at a slower pace compared to last year. Much of the labour market adjustment in response to subdued economic activity is likely to come through a reduction in average working hours. Job growth is forecast to slow and may temporarily lag behind the growth of the working-age population. While labour force participation is expected to decline slightly as economic conditions soften, it is still projected to remain at relatively high levels.

Technical Assumptions in the Forecast
The following assumptions underpin the RBA’s forecasts:

• The cash rate is assumed to remain close to its current level of 4.35% until mid-2024, after which it is expected to decline to around 3.25% by mid-2026. This is slightly lower than the forecast from the November Statement.
• The exchange rate is assumed to stay at its current level, which is 1.7% higher than the November forecast on a trade-weighted basis.
• Crude oil prices are expected to remain roughly unchanged at current levels for the rest of the forecast period, which is 4% lower than the November forecast.
• Population growth has been slightly revised upward due to stronger-than-expected net overseas migration. Although migration policy changes are expected to partially offset this trend, year-on-year population growth is projected to have peaked in the September quarter at around 2.5%. It is then expected to return to its pre-pandemic average of about 1.5%.