Australians who’ve put up with successive interest rate rises from the Reserve Bank (RBA) would understandably be excited at the prospect of rates going down.
After all, a borrower with the Australian average loan size of about $600,000 now pays $1155 more on their mortgage each month than they did a year ago, and those who locked in record low rates can expect a big jump in repayments when their fixed periods expire.
Rate relief could be closer than many think, with the big banks now forecasting interest rate cuts as early as this year.
While most major lenders now expect the cash rate to top out at 4.1 per cent in May this year, one of the big four banks believes rates won’t quite get that high, and will fall within months of reaching the peak.
Australia’s biggest bank, Commonwealth Bank (CBA), thinks the RBA’s rapid rate tightening cycle could be slowing the economy faster than expected, requiring the RBA to halt rate hikes sooner than others are predicting.
“The recent data indicates that the RBA may now be tightening policy into an economy that is already showing sufficient signs of softening from an output, prices and employment perspective,” CBA head of Australian economics Gareth Aird said in a recent economic update.
“That is our assessment. But the [RBA] Board won’t arrive at that conclusion yet.”
CBA thinks inflation will come down sooner than expected, opening the door to rate cuts towards the end of this year.
“Our central scenario is that the peak in the cash rate is 3.85 per cent. And we look for 50 [basis points] of policy easing in Q4 [2023].”
Aird said CBA has forecast 100 basis points of rate cuts by mid-2024.
“They’re going to have to go down a fair bit from where they’re expected to get to simply because they’ll go to a high level that causes unemployment to rise,” he told Domain. “At some point it’s not acceptable for the unemployment rate to keep rising.”
Meanwhile, Westpac chief economist Bill Evans expects the RBA to pause hikes after increasing the cash rate in March, April and May, forecasting a series of rate cuts starting early next year.
“At 4.1 per cent, the cash rate will be in deeply contractionary territory and a pause will be appropriate,” he said in an update. “The decision to pause will be with a reasonable view that the tightening cycle has peaked.”
Westpac thinks peak interest rates won’t slow the economy enough to bring inflation down before the end of the year.
“Further out, the next move is likely to be a rate cut beginning in the March quarter 2024.”
Westpac expects the RBA will cut the cash rate up to seven times throughout the next few years.
“Over the course of 2024 and 2025, we see 175 [basis points] of cuts to a low of 2.35 per cent where the cash rate is expected to settle.”
NAB chief economist Alan Oster expects the cash rate will peak at 4.1 per cent in May and start coming down in early 2024 before settling at about 3 per cent.
“We think they’ll be cutting by February next year, and we think they’ll probably do – during the course of the next six months beyond that – something like 100 [basis] points of cuts,” he told Domain.
ANZ offers a bleaker prediction for borrowers, arguing the effects of rising interest rates haven’t put enough of a dampener on the economy for the RBA to cut rates any time soon.
“The nascent recovery in housing prices would suggest that rate hikes have not yet quelled demand enough to be confident that inflation will move back into the target band in a reasonable time frame,” ANZ senior economist Felicity Emmett said in an update.
Like others, ANZ expects a May peak, but believes interest rates will need to be higher for longer before the RBA can justify a cut.
“To date there is little evidence of a material impact on overall spending,” Emmett said.
“Persistence in inflation pressures suggests that the cash rate will remain in restrictive territory for some time.”
“We do not expect the RBA to start easing until a 25 basis point cut in November 2024.”
Domain Home Loans chief executive Kareene Koh said banks use a range of factors when assessing whether to pass on rate reductions to borrowers, with the cash rate being one of them.
“Having said that, given the current challenges many Australians are facing, I would hope that the banks would aim to pass any decrease on in a timely manner,” she said.
Koh says borrowers should continue managing their household budget carefully to put themselves in a good position to handle higher repayments for the next six to 18 months.
“If this is challenging then it’s worth talking to your bank about an interest-only option to get through this challenging period and then returning to interest and principal when rates come down again to start paying off your loan.”
f you’re a first-time investor or it’s been a long time since you last bought property, the property hunt can be a daunting prospect. Like any other major purchase, solid preparation helps to ensure a smoother journey. “Think of it like travelling to a foreign place – most of us … Read more
Bright colours and patterns are in, stark whites are out. Home offices are gradually being taken over by more integrated spaces and curves are back in a big way. The design trends of 2023 are here and they are making a departure from some of the popular looks of last … Read more