Why the Commonwealth Bank predicts Aussies with a mortgage will get three rate cuts by Christmas with more relief coming in 2025

Australia’s largest home lender now expects borrowers to get three rate cuts by Christmas and more relief in 2025.

The prospect of six cuts by the middle of next year would represent the most generous concessions to mortgage holders since the global financial crisis of 2008 and 2009, and the first relief since the Covid pandemic in 2020.

The highest unemployment rate in two years has led to suggestions that the Reserve Bank will have to be friendlier to borrowers to prevent the unemployment rate from rising too high.

Commonwealth Bank head of Australian economics Gareth Aird now expects the Reserve Bank to ease monetary policy in September, November and December this year.

“In our base case, the RBA will begin an easing cycle in September 2024 – 75 basis points of rate cuts by the end of 2024 and a further 75 basis points of rate cuts in the first half of ’25,” he said.

This would see the RBA cash rate fall for the first time since May 2023 from the existing 12-year high of 4.35 per cent to 3.6 per cent in December.

Mr Aird also predicts three more cuts in the first half of 2025, which would take the RBA cash rate down to 2.85 per cent for the first time since December 2022.

The 150 basis points easing in nine months would represent the most generous relief for home borrowers since the Reserve Bank cut rates by 425 basis points in 2008 and 2009 during the global financial crisis.

But it won’t completely reverse the 425 basis points of rate hikes between May 2022 and November 2023 – when the Reserve Bank raised rates for the thirteenth time in eighteen months in November.

This marked the steepest pace of monetary policy tightening since 1989.

Inflation fell from a 32-year high of 7.8 percent at the end of 2022 to a two-year low of 4.1 percent at the end of 2023.

The consumer price index, also known as headline inflation, is still well above the Reserve Bank’s target of 2 to 3 percent.

But Aird expects underlying inflation to fall back to the top of that range by mid-2024, when volatile items like gasoline are excluded.

This is much earlier than the Reserve Bank’s forecast that average inflation will fall to 3 percent by June 2025, based on average price movements that exclude items where prices fluctuate wildly.

The Commonwealth Bank said interest rate cuts would be needed by the end of 2024 to prevent unemployment from rising above 4.5 percent.

“The transmission channel of monetary policy through the mortgage market is much more direct in Australia and we believe rate cuts in the second half of ’24 will be necessary to prevent the unemployment rate from rising above 4.5 percent,” Mr Aird said.

Unemployment rose to a two-year high of 4.1 percent in January, up from 3.9 percent, with Treasurer Jim Chalmers blaming interest rate rises.

“This is also the inevitable consequence of higher interest rates and persistent inflation and global economic uncertainty,” Dr Chalmers said on Thursday.

But in NSW, where house prices are higher, unemployment rose from a lower base of 3.4 per cent to 4.1 per cent.

Commonwealth Bank’s head of Australian economics Gareth Aird expects the Reserve Bank to ease monetary policy in September, November and December

This is the state where the average new mortgage of $785,405 is significantly higher than the record-high national average of $624,383, Australian Bureau of Statistics figures show.

That means monthly mortgage repayments are $5,100, compared to $3,900 nationally, based on a Commonwealth Bank variable interest rate of 6.79 per cent.

The typical first-time borrower in New South Wales would pay off a $981,756 home with a 20 percent deposit.

This would most likely be in a south-west Sydney suburb where houses, while expensive, are still much more affordable than Sydney’s median value of $1.395 million, based on CoreLogic data.

The Reserve Bank will hold eight two-day board meetings in 2024 instead of 11 one-day meetings on the first Tuesday of every month except January.

The Reserve Bank will hold eight two-day board meetings in 2024 instead of eleven one-day meetings on the first Tuesday of every month, excluding January (Governor Michele Bullock is pictured)

This will see Australia emulate the US Federal Reserve, which also meets eight times a year, with the RBA changes set to be legislated after a review in 2024.

Unlike American borrowers, Australians cannot get a 30-year fixed mortgage rate.

This meant Australian borrowers faced a sharper increase in mortgage costs when the ultra-low, two-year fixed rate expired in 2023, leading to an abrupt 69 percent increase in monthly repayments.

“Average outstanding mortgage rates have increased by a much larger amount in Australia,” Mr Aird said.