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Westpac now expects seven interest rate cuts in 2024 and 2025, but only after severe Reserve Bank hikes hit the economy.
Borrowers since May of last year have faced nine straight monthly RBA rate hikes, and Westpac still expects three more in March, April and May that would take the cash rate to an 11-year high of 4.1 percent.
But after that, Westpac chief economist Bill Evans expects the Reserve Bank to start cutting interest rates by the end of March 2024.
Seven decreases would reduce $643 of monthly payments on an average $600,000 mortgage.
“While we expect the economy to stagnate in the second half of 2023, there will not be enough progress in bringing inflation on target before the end of 2023 to accommodate earlier rate cuts,” it said.
Westpac now expects seven interest rate cuts in 2024 and 2025 after severe Reserve Bank hikes hit the economy (a Sydney branch pictured)
Westpac forecasts that the RBA will cut rates by a quarter of a percentage point for the March 2024 quarter, bringing the cash rate back down to 3.85 percent.
Rates would fall another 25 basis points by the end of June 2024, bringing the cash rate down to 3.6%, and a further drop of the same size in September would bring rates to where they are now: 3.35%. .
That would be followed by a series of cuts that would bring rates to 2.35 percent for the September 2025 quarter.
Those seven rate cuts in 2024 and 2025 would simply put the RBA cash rate back to where it was at the start of October 2022.
Inflation last year rose to 7.8 percent, the steepest pace since 1990 and well above the RBA’s target 2 to 3 percent of where it should be.
Westpac now expects inflation to fall to 4 percent by the end of 2023 and 3 percent by the end of 2024, “allowing for a policy response to a stagnant economy by the first quarter of 2024.”
The Reserve Bank does not expect headline inflation, also known as the consumer price index, to fall to 3 percent until the June 2025 quarter.
Those seven rate cuts in 2024 and 2025 would simply put the RBA cash rate back to where it was at the start of October 2022 (a Sydney auctioneer in early 2021 pictured)
The 3.25 percentage point rate hike in just over nine months has marked the most severe pace of monetary policy tightening since the RBA began announcing a target cash rate in January 1990.
A borrower with an average $600,000 mortgage has already seen their monthly payments increase by 42 percent to $3,284, up from $2,306, according to a Commonwealth Bank variable rate that rises to 5.17 percent, up from 2.29 percent a year ago. Begginings of may.
Three more rate increases would add another $283 to the monthly payments, taking them to $3,567, as a CBA variable rate rose to 5.92 percent to reflect an RBA cash rate of 4.1 percent.
But 1.75 percentage points of rate cuts in 2024 and 2025 would bring that down to $2,924, a drop of $643 from the expected peak of the rate hike cycle in May 2023.
This would cause a Commonwealth Bank variable rate to fall to 4.17 percent, as it followed the RBA cash rate drop to 2.35 percent.
The RBA last cut interest rates in November 2020, driving the cash rate to a record low of 0.1 percent.
Westpac forecasts seven rate cuts would come after 12 consecutive monthly increases.
This would mean a net increase of five compared to early May 2022 before the RBA tightened for the first time since November 2010.
Last year wages rose 3.3 percent, the fastest pace in a decade, but wage increases are well below the 7.8 percent inflation rate, meaning Australian workers are suffering a cut in real wages.
Evans said that by June, the Reserve Bank would decide to stop raising rates, which would be the first month without a rate hike since April 2022.
‘We hope there is credible evidence that demand is slowing down; labor markets are relaxing; and the risks of a wage-price spiral have receded,’ he said.
“The decision to pause will be with a reasonable view that the tightening cycle has peaked.”