Tim Hext: Cash rates at 3.1% this year ‘a good bet’

Cash rates finishing the year at 3.1% seems like a good bet, writes Pendal’s head of government bonds TIM HEXT. Here’s why

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THE GDP numbers for Q1 2025 were released today.

In volume terms, the economy grew by 0.2%. This leaves the annual rate at 1.3%.

Against population growth of 0.4%, we are once again back to the negative GDP per capita growth story seen over most of the past two years.

There was some dampening in mining and tourism from poor weather in Queensland and Western Australia, but the result will be a disappointment to the government and – more importantly – the RBA.

This is supposed to be the year that the primarily government-led growth of the past few years gives way for a resurgent private sector.

After all, tax cuts, rate cuts and positive real wages leave households with more cash to spend.

Public demand fell 0.4% in the quarter, led by a 2% fall in public investment. While we doubt it is the start of bigger falls, it will continue to taper off.

Private investment rose 0.7%, led by buildings and construction.

So far so good, in terms of following the script.

However, we the consumer are yet to come to the party. Household spending rose 0.4% but only really on essential items, partly offsetting reduced government subsidies.

It seems we are saving our income boost more than spending it – with the household savings rate rising to 5.2%, the highest since the pandemic.

It seems unlikely that this will change anytime soon as the trade wars won’t exactly fill consumers with confidence.

A couple of other points to note.

There were still no productivity gains, with productivity being flat for the quarter and actually 1% lower over the year.

Also disappointing was the lack of consumer growth in NSW and Victoria, where consumers should have responded more positively to income gains.

Cash rate implications

GDP always lags data, but the weaker trend is unlikely to change a lot in the current quarter.

Overall, the RBA was expecting growth to be at 1.8% by the end of June. This forecast only came out two weeks ago. Q2 last year was 0.2%, so the central bank would need to see a 0.7% result for Q2 this year.

While we expect growth to continue to pick up, it is likely GDP will be closer to 1.5% by the end of June and below the RBA’s 2025 forecast of 2.1% by year-end.

We were expecting the RBA to hold off till August to cut rates, in line with its quarterly CPI cycle.

However, recent consumer data (retail sales, household spending, and GDP) now suggests the RBA will cut in July to give the consumer a further boost to pick up their spending.

Cash rates finishing the year at 3.1%, or around their estimate of neutral, seems like a good bet.

About Tim Hext and Pendal’s Income & Fixed Interest boutique

Tim Hext is a Pendal portfolio manager and head of government bond strategies in our Income and Fixed Interest team.

Tim has extensive experience in banking, financial markets and funding including senior positions with NSW Treasury Corporation (TCorp), Westpac Treasury, Commonwealth Bank of Australia, Deutsche Bank, Bain & Co and Swiss Bank Corporation.

Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia.

The team won Lonsec’s Active Fixed Income Fund of the Year award in 2021 and Zenith’s Australian Fixed Interest award in 2020.

Find out more about Pendal’s fixed interest strategies here

About Pendal

Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.

In 2023, Pendal became part of Perpetual Limited (ASX:PPT), bringing together two of Australia’s most respected active asset management brands to create a global leader in multi-boutique asset management with autonomous, world-class investment capabilities and a growing leadership position in ESG.

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