Can you see the rate cut coming?

By Graeme Salt

This week saw evidence that inflation is increasingly under control – prompting questions as to when (not if) the Reserve Bank will reduce interest rates.

Underlying inflation fell to 3.4 per cent over the year to August. The Reserve Bank (RBA) aims for inflation to be in a 2-3 per cent band.  But, as monetary policy is a lagging instrument, most economists argue that interest rates will start coming down as the RBA anticipates it will reach this 2-3 per cent band.

Of the Big Four banks, Westpac, NAB and ANZ predict a rate cut in February 2025.

Clearly we are getting closer to a rate cut as the Governor said in her press conference that, for the first time, the RBA did not consider increasing rates.

However, here is the tricky bit – and why you should not expect too many rate cuts.

Gross domestic product (a measure of how many goods and services the economy is producing) is still growing. And at 4.1 per cent in August, the unemployment rate shows we’ve managed to hold on to a lot of the gains in our labour market.

Less than one per cent of all owner-occupier housing loan balances are in arrears over 90 days. And the share of variable-rate owner-occupier borrowers who are estimated to have had essential expenses and scheduled mortgage repayments exceed their income, leading to an estimated cash flow shortfall, has remained only at around five per cent.

Despite budget pressures remaining elevated, most borrowers have proven able to continue servicing their debts and covering their essential costs without dipping into their savings over the first half of 2024.

But with minimum mortgage repayments have risen by between 30 per cent and 60 per cent since the first cash rate rise in May 2022, the RBA has war-gamed what happens to household budgets if rates stay high.

The economy has proven itself strong enough.

All the above means that the next move for rates is down.  But don’t expect too many, nor too large rate cuts.

Graeme Salt is an award-winning mortgage broker.  For a no-obligations consultation on your home loan needs, please contact him on 02 9922 5055.