Rates down by year end, even mid-year
Michelle Bullock, our new Reserve Bank of Australia (RBA) Governor made clear that the economic landscape is uncertain, suggesting that further rate hikes may be required in 2024. Not what mortgage holders want to hear. The RBA emphasised that they will be carefully considering the data before they make interest rate moves this year. Leading economists suggest that while no one is expecting a rate hike, it’s possible. The broad consensus amongst the experts is that rates will remain where they are for a while, with cuts expected towards the end of the year with some expecting them as early as mid-year. Some banks have already started to cut rates which is welcoming news to borrowers.
The new RBA keeps it real
The RBA board now meets 8 times a year (Feb, Mar, May, June, Aug, Sept, Nov and Dec) and the meetings will now take place over two days. This new approach came about because of the 2023 RBA review and now a press conference is to occur at 3.30pm on the first Tuesday of the occurring month, following the 2.30pm board decision.
The RBA’s first post meeting conference and the first statement on monetary policy for 2024 made clear that rates could go up or down this year. The RBA Governor has made an effort to strip back a lot of the jargon and keep things simple in their communication and responses to journalists. Bullock made clear that “people are doing it tough … because of inflation” and “the best thing we can do to help households … is to get inflation down”. This comment shows the type of real talk and tone, the new RBA Governor is willing to communicate in.
A patient RBA - watching and waiting
While inflation continues to ease, it’s still a problem. This is the underlying tone out of the RBA in this recent update, and the inflation data is what they are waiting to see move and be consistent in or near their 2-3 per cent target range, before they make any interest rate changes.
According to the Australian Bureau of Statistics, inflation moderated to 4.1 per cent in the December quarter, where it was close to 7 per cent this time last year. See here when the RBA expects to get back to target:
Summary of the RBA’s February 2024 statement:
- The jobs market remains tight with labour shortages, driven by population growth, but is cooling
- Domestic cost pressures are still apparent
- Household spending and savings are being squeezed
- International economic risks are still apparent with what is happening in the Middle East, Ukraine and the uncertainty surrounding the Chinese economy
RBA can cut rates before they get to target
The RBA Governor was firm in her prudent approach, making clear that there’s extreme uncertainty surrounding the direction of the economy. The RBA governor didn’t want to signal to the economy any false hopes of potential rate decreases, any time soon. If the RBA became confident this year, that the inflation rate was or is on track to get to 2-3 per cent then the RBA “might be able to think about it” and would consider cash rate cuts, Bullock said.
Predictions from the experts
As the RBA maintains its somewhat cautious but somewhat softer tightening bias, AMP’s chief economist Shane Oliver on the other hand, believes otherwise. He believes interest rates have peaked at 4.35 per cent and believes rate cuts will start around mid-year, “with three 0.25 per cent rate cuts by the year’s end,” he said.
NAB’s economists believe we will have the cash rate start to move towards the end of the year in December 2024, and then aggressively come down in 2025 with the cash rate going as low as 3.1 per cent by December 2025.
Judo Bank’s leading economist, Warren Hogan, has made clear that there’s a strong expectation that interest rates will fall this year and penciled in a 0.35 per cent cut for November 2024.
Macquarie quick out of the gates
The cash rate, which is what the RBA is setting here with monetary policy, determines the cost that our banks must pay (base rate) for the money that they buy. The banks buy their money from the RBA and markets, before adding their margins to it and then they lend it to borrowers.
Money markets believe a rate cut is going to happen this year, so the funding cost for banks has come down a tad and Macquarie bank for example, is one of the banks that has off the back of this, recently offered lower 3 year fixed rates to home loan customers. Now to take a fixed rate at 5.99 per cent, for 3 years, is a bit of a gamble in an environment where rates are expected to fall in the next 12-18 months according to economists. Macquarie has also lowered their variable rates for home loan borrowers significantly, but this is tiered according to purpose, loan to valuation ratio and repayment type. Something we’re watching closely in the industry and what we’re expecting a lot more of this year with the banks.
We should see fixed rates come down in 2024 and the questions on all our borrower’s minds will be, when is the optimal time to fix or is it a good time to fix?
What to watch this week, especially out of the US economy
Historically, our Australian economy follows the trends from the US economy to a degree and we seem to be lagging, by about 6 months or so, according to economists. They led inflation on the way up and they are ahead of the curve with getting their inflation under control, Shane Oliver from AMP said.
On Tuesday this week, US economy CPI inflation figures for January are due which economists, such as Shane Oliver, are expecting to cool, taking inflation down to 2.9 per cent year on year over there, down from 3.4 per cent. This would be encouraging news out of the US economy and information to support their rate cut hopes, which we hope has a rippling effect here.
Judo Bank economist Warren Hogan emphasised that the OECD Leading Indicator, shows that the global economy is in the early stages of recovering, following the slowdown over the last 2 years. He also made clear that Australia is running about 6 months behind the global economic cycles and of importance, rate cycles. So, if they cut rates over in the US anytime soon, we could expect something similar in 6 months or so.
Summary
The message out of the RBA is that while inflation is heading in the right direction, it is still too high. While the RBA is suggesting that they are not ruling out a rate increase, no expert thinks this will eventuate. Experts are predicting rate cuts to occur mid-year with the majority agreeing that we should see them at the end of the year. The banks will all start to drop fixed home loan rates and we should see business banking or commercial lending rates come down too, which will be welcoming news to all borrowers. We will continue to stay close to all of this and continue to ensure your lending solution is in your best interests to tackle this challenging period.
If you want to know more about the different rates, terms, or bank specials on offer at the moment or just have a general question, please send a note to peter@blackandwhitefinance.com.au or click the start today button a little lower. With the help of our amazing Mortgage Broker Sydney – Black and White Finance team, we will be able to support you.
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