Interest rates: RBA economist Sarah Hunter says rate relief may take some time to flow through to consumers

Australian consumers and businesses hoping for quick relief from the Reserve Bank’s recent interest rate cut may be in for disappointment, with the central bank confirming the full benefits won’t materialise until well after the next Federal election.

Setting rates is a delicate balancing act, said Sarah Hunter, the Reserve Bank’s most senior economist, where the impact of policy lags by up to a year. Speaking at a banking summit, Ms Hunter explained that the upswing from February’s rate cut would take nine to twelve months to fully flow through to GDP, pushing any boost to growth and spending well into late 2025 or beyond.

That timing could leave the next government, rather than the current one, reaping the benefits of the shift towards looser monetary settings.

The RBA uses a macroeconomic forecasting tool known as the MARTIN model to track how rate changes ripple through different parts of the economy.

Imports and exports react fastest, thanks to shifts in the exchange rate; dwelling investment follows, as lower mortgage rates stimulate housing demand; consumer spending starts slowly but builds over time as mortgage payments adjust; and finally, business investment responds, driven by improving consumer confidence.

Ms Hunter said the Board judged it was “the right time to take some restrictiveness away” at its February meeting but remained cautious about further cuts. She pointed to early signs of recovery in household spending, particularly in the December quarter last year, as evidence the economy was already stabilising. Increases in the ABS household spending indicator and credit and debit card data reflected a modest lift in disposable incomes, aided by Stage 3 tax cuts.

While part of that spending growth was linked to Black Friday sales, Ms Hunter noted the Bank had seen signs of more discretionary spending, such as dining out, which suggested improving consumer sentiment.

Still, uncertainty clouds the outlook. Chief among concerns is the Trump administration’s aggressive trade policy.

“One of the things we are focused on right now is US policy settings, the impact of these on the global economy and how this flows through to activity and inflation here in Australia; we have been using scenarios, analysis and judgment to assess the policy implications,” Ms Hunter said.

That uncertainty may already be filtering through to households. Shortly after Ms Hunter’s speech, an ANZ Roy Morgan survey showed consumer confidence had dropped to its lowest level since October 2024. Less than one in ten Australians expect “good times” for the economy in the next 12 months, and half say they are worse off than this time last year.

“The impacts of ex-tropical cyclone Alfred have pushed Queensland confidence to equal-lowest with South Australia, while global trade uncertainty may be weighing on confidence nationally,” ANZ economist Sophia Angala said.

Business confidence isn’t much stronger. The latest ACCI-Westpac survey of manufacturing conditions showed a modest improvement to start the year, with increases in new orders and output. Yet, firms continued to grapple with rising input costs and persistent labour shortages, squeezing margins. Manufacturers pared back expectations for business conditions over the next six months, citing concerns over US tariffs and weakening export prospects.

“These results, I think in part reflect the fact that we saw that first interest rate reduction in February,” ACCI CEO Andrew McKellar said. “The deep pessimism that was there 12 or 18 months ago seems to have passed and obviously the impact of changing global economic circumstances yet to be factored in.”

Speaking at the same banking summit, the chair of financial services regulator APRA has warned that Australian business and political leaders face a “geopolitical maelstrom brewing overseas”, and said that “international upheaval is the number one topic” he is asked about by CEOs and board members.

The Australian Prudential and Regulatory Authority’s John Lonsdale said the financial services sector — representing around $9 trillion in assets — faced rising uncertainty, including the risk of a global trade war, ongoing military conflicts in Europe and the Middle East, territorial disputes in the Asia-Pacific, and weakening international financial regulation post-global financial crisis.

Mr Lonsdale said while the US was planning to roll back a key pillar of the post-GFC regulatory system — the Basel III framework — he was not seeing significant appetite for a “wholesale rollback of the regulatory settings that have helped to protect global financial stability since the GFC”.

“We are reluctant to lower the regulatory standards that keep Australia’s financial system resilient and our economy strong, particularly when we see geopolitical risks increasing,” Mr Lonsdale said.

“Poor governance creates weaknesses, which can crystallise in misconduct, losses and failures. Think of any of the major financial collapses from recent decades — Silicon Valley Bank and Credit Suisse, Lehmann Brothers and Royal Bank of Scotland, HIH Insurance and Pyramid Building Society in Australia — and poor governance was integral in every case.”

A split between the US and a more conservative financial sector in Europe and Australia could further fracture the global consensus that has underpinned the international rules based order of the post-War era and may compound attempts to deal with any fallout from a trade war. Rising global trade tensions have also prompted a fresh warning from the Organisation for Economic Co-operation and Development, which overnight downgraded Australia’s 2026 growth forecast.

In its latest interim outlook, the OECD downgraded Australia’s 2026 growth forecast to 1.9 per cent, down from 2.5 per cent. The OECD cut its global growth outlook to 3.1 per cent in 2025 and 3 per cent in 2026, cautioning that a broader trade war sparked by the Trump administration could sap growth and reignite inflation.

Despite February’s rate cut, further easing looks unlikely in the near term. Ms Hunter revealed the inflationary effects of monetary policy take even longer than the GDP impact — peaking around mid-2026 — underscoring the RBA’s reluctance to move hastily. After years of high inflation described by governor Michele Bullock as hitting lower-income Australians “very hard”, the bank is expected to hold steady.

Markets currently price the chance of another cut at just 10 per cent for the next meeting at month’s end, meaning any rate reprieve likely won’t come before voters head to the polls.

With further interest rate relief unlikely in the short term and global risks rising, an increasingly bitter election campaign is adding to the uncertainty.

The Government has warned the cupboard is bare for new spending promises, leaving little scope for fiscal stimulus.

Together, these factors risk pushing business and consumer confidence back into a holding pattern, with households and firms waiting for clarity on the post-election outlook.