Preface

This week, the announcement by the four major banks in Australia to lower term deposit interest rates has attracted market attention.

Everyone is cheering, the long-awaited interest rate cut in Australia is finally coming!

However, the subsequent hawkish stance of the Reserve Bank of Australia (RBA) governor has extinguished the just ignited spark.

The hawkish behavior of the central bank has also become a focal topic in the economic field.

So why are Australian commercial banks starting to cut interest rates in advance?

This complex situation not only reflects the internal contradictions of the Australian economy but also foreshadows the uncertainty of future policy directions.

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Bank Interest Rate Cut

This week, several major banks in Australia are significantly reducing term deposit interest rates.

The Commonwealth Bank of Australia (CBA) took the lead in cutting the interest rates on almost all of its term deposit products by up to 50 basis points (i.e., 0.5%).Following closely behind, the National Australia Bank (NAB) and Australia and New Zealand Banking Group (ANZ) have also taken similar measures.

This series of interest rate cuts will reduce the interest on a 100,000 AUD deposit by up to 730 AUD over 12 months.

The move is primarily in response to the potential interest rate cut decision by the Reserve Bank of Australia (RBA).

The market anticipates that the RBA will cut interest rates in December, although the expected reduction is only 25 basis points.

However, banks are adjusting their term deposit rates in advance to protect their profit margins and reduce the pressure brought about by the rate cut.

The impact of the rate cut on bank profitability is apparent.

Lowering the deposit interest rate can effectively alleviate the profit pressure brought by fierce competition.

According to an analysis by JPMorgan Chase, bank profitability faces "ongoing drag."

Sally Tindall, Group Executive of Research at Canstar, noted that banks are taking preemptive action to avoid paying unprofitable high interest after the rate cut.

Especially with inflation still high, banks are even more hopeful that adjusting deposit rates will help maintain profits.Australia's economic growth is slowing down, and the labor market is underperforming expectations.

Economists anticipate that Australia's economic growth rate in 2024 may only be around 2.5%, while the unemployment rate and CPI are expected to rise compared to 2023.

In such circumstances, the CPI gradually falls back within the target range set by the Reserve Bank of Australia (RBA), but wage growth (nominal wages are increasing rapidly, but real wages are actually declining) fails to effectively stimulate consumption, and business investment becomes more cautious.

Especially in an environment of high household debt and declining savings rates, interest rate cuts can help alleviate consumers' debt burdens and boost consumer confidence.

At the same time, uncertainties in the international trade environment and the tense situation in the global supply chain have had a negative impact on Australian exports.

Additionally, the growth of Australian housing prices has slowed down sharply, and signs of a cooling real estate market in some major cities are evident.

CoreLogic data shows that recently, housing prices in some parts of Australia have experienced declines or stagnation (for the wealth effect, please refer to previous articles), which also has a negative impact on the economy.

Australia's economic situation is also affected by the pressure of high mortgage interest rates. In just the past three months, the cost of paying mortgage interest has reached nearly 20 billion Australian dollars, and this high cost is forcing consumers to cut back on spending.

The sharp increase in mortgage interest payments has driven the proportion of household income used to repay mortgages to a historical high, further increasing the economic burden.

The hawkish Reserve Bank of AustraliaHowever, in stark contrast, the Australian central bank has shown a hawkish stance.

A hawkish position typically implies a preference for a more restrictive monetary policy.

The governor of the Reserve Bank of Australia, Michelle Bullock, has repeatedly stated that despite signs of easing inflation, it is too early to consider a rate cut.

She warned that inflation is still "too high" and is not expected to return to the central bank's target range of 2%-3% before the end of next year.

The Australian central bank believes that cutting rates too early could lead to a rebound in inflation, undermining the hard-won stability in prices.

Therefore, the Australian central bank maintains its hawkish stance, emphasizing that it will not easily relax monetary policy until inflation is effectively controlled.

As the Federal Reserve is expected to start cutting rates in September, the Australian central bank is likely to follow suit.

So once the United States cuts interest rates, there will be room for Australia's monetary policy to become more accommodative.

The Australian dollar exchange rate against the US dollar has also been affected accordingly. With the approach of the US rate cut and the relatively hawkish stance of the Reserve Bank of Australia, as well as the leading rate cut by Australian banks, the Australian dollar has fluctuated significantly against the US dollar in recent times.

It quickly rebounded from a low of 0.638 to a recent high of 0.676. As shown in the figure below, it is still the expected trend of the Australian dollar against the US dollar drawn last year.Interest Rate Cuts and Hawkish Stances Coexist

Market Reaction and Expectation Management: The coexistence of interest rate cuts by Australian banks and the hawkish stance of the Reserve Bank of Australia (RBA) has had a complex impact on the market.

On one hand, the news of interest rate cuts has boosted market sentiment, driving up stock and bond markets;

On the other hand, the RBA's hawkish stance has limited the assistance in maintaining a relatively strong role for the Australian dollar, in order to prevent the occurrence of imported inflation as inflation steadily returns.

For businesses, the interest rate cut reduces financing costs, which helps to increase the willingness to invest and expand production scales, thereby stimulating economic growth.

However, the RBA's hawkish stance also reminds businesses to maintain a cautious attitude to avoid excessive expansion leading to risk exposure.

Conclusion

In the global financial system, market participants and investors often closely monitor the policy trends of central banks and attempt to predict their future monetary policies.

As a result, the reactions of financial markets often precede the actual actions of central banks.

This means that the market adjusts based on expectations of central bank policies, thus reflecting these expectations to some extent before the central bank officially announces new monetary policies.This phenomenon is very common in the financial market. Whether it is interest rate adjustments, changes in the money supply, or other important policy decisions, the market usually reacts in advance, trying to gain a favorable position before the information is fully disclosed.

Therefore, based on the current interest rate cut measures of the Australian banks, it can be speculated that the Reserve Bank of Australia may take the next step of interest rate cuts in December this year!