December 29th 2024.
Australian mortgage holders are eagerly waiting for some relief from the Reserve Bank in 2025, after enduring a full year of high interest rates stuck at 4.35%. Economists are predicting that the RBA will start lowering the cash rate by the middle of the year, although their opinions on the number of cuts vary.
But what exactly does the RBA consider when setting interest rates? The truth is, we don't know for sure. RBA Governor Michele Bullock has been cautious in avoiding any hints about when they will make a move. However, other economists are more willing to make predictions.
According to Commonwealth Bank, the most optimistic of the big four banks, the RBA will cut the cash rate by 0.25% in their first meeting of 2025, which is in February. On the other hand, ANZ, Westpac, and NAB all believe that the first rate cut will occur in May. The broader market falls somewhere in between, with financial markets currently anticipating a cut in April.
It's important to keep in mind that these are simply predictions and have been proven wrong in the past. Earlier this year, forecasts were expecting a cut before Christmas, but as core inflation remained out of the RBA's target range and unemployment stayed low, the timeline was pushed back.
One forecast that stood out was that of Treasury, which was included in May's federal budget papers. It stated that "the cash rate is assumed to gradually ease from around the middle of 2025." At the time, this was a more conservative prediction compared to others, but it is now in line with what most economists are expecting.
Moving on to the end of 2025, there is more speculation about the cash rate. The big four banks are predicting anywhere between two and five cuts throughout the year. If CBA and Westpac are correct, interest rates will be lowered four times, bringing them down to 3.35% by the end of the year. ANZ, on the other hand, is only expecting two cuts, resulting in an end-year cash rate of 3.85%. NAB has a different outlook, with expectations of no action for 18 months followed by five cuts in the last six meetings of the year. This would bring interest rates down to 3.1%.
Outside of the big four banks, there is more variation in predictions. The market is anticipating an end-year cash rate of 3.6%, while the OECD believes it will reach 3.35% by "early 2026". These may seem like small differences, but for the average homeowner with a $640,998 mortgage, a 0.25% change in interest rates can result in significant savings. For instance, if there are five rate cuts next year, that would mean a monthly savings of $720, which is $432 more than if there were only two cuts.
It's important to note that the information provided on this website is general in nature and does not constitute personal financial advice. Before making any decisions, it's crucial to consider your personal objectives, financial situation, and needs.
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