After the Reserve Bank of Australia’s (RBA) attack on the rising cost of living over 2022 and 2023, borrowers are ready for rates to ease.
In the first couple of months of 2024 commentary economists began speculating whether interest rates would be cut this year. But now, there is more hesitation.
While there’s a lot that can change in both the global and domestic economies to impact when the RBA will start cutting rates, we can take a look at what the data is telling us currently and what economists are saying.
Finder runs a survey of its panel of economists every month, asking questions from what they think the RBA will do next to their thoughts on government reform. Lately, we've been asking when they think the RBA will first cut the cash rate.
Of the economists surveyed ahead of the May cash rate decision, most now think the cash rate will be cut at the end of the year or early next year. Previous surveys saw economists predict the cash rate would be cut as early as mid-2024.
The near-term risk sits with an interest rate hike. But we expect the RBA to be on hold over the next six months given the economy is still contracting on a per capita basis, inflation is forecast to fall further and the labour market is anticipated to loosen.
Gareth Aird
Head of Australian economics
Rents, insurance and other services remain key drivers and while this will not be out of line with the RBA's forecasts, more improvement will be needed before a first rate cut, which we continue to expect in November this year.
Gareth Spence, Brody Viney, Alan Oster
NAB Group Economics
Inflation is not coming down as quickly as we expected, or the Reserve Bank of Australia would like, and as such we now expect the cash rate to remain on hold until the November Board meeting.
Luci Ellis
Chief economist at Westpac
Looming stage-three tax cuts due to start in July will keep the RBA on its toes; those tax cuts will add money to the economy at the same time as the RBA is trying to take it out. What's more, a chunk of progress on inflation has come from temporary government rebates that will eventually unwind. Those aren't deal-breakers for the RBA, but they will delay rate cuts. We had expected the first rate cut to come in September. Increasingly, it's looking like we'll have to wait until December.
Harry Murphy Cruise
Economist at Moody's Analytics
Stubbornly high core inflation leaves the RBA with no choice but to maintain tight monetary policy, so we still expect the cash rate to remain at 4.35% throughout 2024. Rate cuts early next year are still likely, but their timing will be data (and demand) dependent.
David Robertson
Head of economic and markets research at Bendigo Bank
In May 2022 the RBA began increasing the cash rate in a bid to beat rising inflation. Inflation, in simple terms, measures the change in household spending. The higher the rate of inflation, the higher the change in the cost of living.
The RBA has a target that inflation should only be between 2% and 3%. In December 2022 it reached a peak of 7.8% – much higher than anyone would like the cost of living to grow by.
In order to bring that rate down and back to the target range, the RBA began lifting the cash rate. Banks, in turn, lifted their own interest rates. This meant that people would spend more on their home loans and spend less on other goods, bringing household spending down as well as prices.
It seems to be working. Inflation has been coming down and the most recent figures show an inflation rate of 3.6% over the 12 months to the March 2024 quarter.
And now that we're so close to the target range, it's no wonder people are questioning when their rates will go down.
Interest rates are higher than they have been since the late 2000s but our latest period of rising rates has not taken us anywhere near the record highs of 1989 and 1990.
The short answer: yes. Although inflation is currently tracking the way the RBA intends it to and economists just a couple of months ago were saying we've reached the interest rate peak, there are many factors at play. Inflation was always going to be "sticky" and that means while one month looks positive, the next month may trend upwards again.
In fact, although the March quarter's annual CPI figure was 3.6%, the quarterly change was 1%. That might sound good, but it's higher than economists had predicted and hoped for. This has led to economists questioning whether the RBA could increase the cash rate again.
After February's cash rate decision, an RBA statement said the board would not hesitate to increase the cash rate again if it was necessary to bring inflation down:
"While recent data indicate that inflation is easing, it remains high. The Board expects that it will be some time yet before inflation is sustainably in the target range. The path of interest rates that will best ensure that inflation returns to target in a reasonable timeframe will depend upon the data and the evolving assessment of risks, and a further increase in interest rates cannot be ruled out."
| Australian interest rates April 2024 | Data |
|---|---|
| Average variable mortgage interest rate | 7.26% |
| Lowest variable rate on Finder's database* | 5.69% |
| Average fixed mortgage interest rate | 6.86% |
| Lowest fixed rate on Finder's database* | 5.48% |
*Lowest rates listed above are based on owner occupier products in Finder's database with LVRs of at least 80%.
It's hard to say how far interest rates may fall (when they eventually do fall). Up until May 2022 interest rates were at record lows, with the cash rate sitting at 0.10%. It's not possible to say whether or not they will fall that low again in the foreseeable future.
The RBA will likely remain cautious after its initial rate cut as it monitors the impact it has on inflation and other areas of the economy like employment. However, Westpac's economist Luci Ellis has speculated the RBA "might cut rates a couple of times".
Whether you want to save money on your home loan repayments or save money on your home loan overall, there are a few ways to do that:
Particularly after the interest rate rises we've seen over 2022 and 2023, it's important to check the rate you are paying on your home loan compared to rates available on the market. Banks and lenders often offer new customers more competitive rates and if you haven't checked your loan in a couple of years you're almost definitely paying a higher rate than you should be.
Look at your repayments and work out how much of what you're paying is going towards your loan and what is going towards fees. Sometimes the interest rate is lower but the ongoing fees are cancelling out any saving. You might find you're better off switching to a loan with a slightly higher interest rate but with no fees to pay. Just make sure you're not missing out on any of the features.
By putting money into your offset account you could save thousands on your overall home loan repayments. An offset account reduces the amount of interest you pay on your loan. So although your monthly repayments stay the same, you'll pay off your loan faster and end up paying less in interest.
It's always a good year to compare your home loan interest rate and see if refinancing is right for you at that moment in time. After 2 years of rising interest rates, 2024 is particularly good. For anyone who has remained on a variable rate over the last 2 years, or who has moved from a fixed rate to a variable rate, it's definitely worth checking your interest rate against the market.
It's probably not a good time to fix a home loan this year. Interest rates have been rising throughout 2022 and 2023, and if they rise again they likely won't keep rising.
Banks and lenders have been reducing their fixed interest rates in an attempt to entice borrowers, but fixing your home loan this year could mean you end up paying a higher interest rate if rates do fall later this year or early next year.
Having said that, fixing your rate works better for some people if they want the stability of knowing what their repayments will be. If that's you, it's totally ok to fix.
No one wants to spend years and years paying off what ends up being mostly interest. Here are several tips on how to pay off your home loan faster.
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