Australia’s biggest property 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 mark 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 prompted a warning that the Reserve Bank will have to start being kinder to borrowers to prevent the unemployment figure from rising too much.
Commonwealth Bank Australian chief economist Gareth Aird now expects the Reserve Bank to ease monetary policy in September, November and December this year.
“Our base case sees the RBA beginning an easing cycle in September 2024: 75 basis points of rate cuts by the end of 2024 and another 75 basis points of cuts in the first half of 2025,” he said.
This would see the RBA cash rate fall from an existing 12-year high of 4.35 percent to 3.6 percent in December for the first time since May 2023.
Australia’s largest home lender now expects borrowers to get three rate cuts by Christmas and more relief in 2025. This would mark the most generous concessions to home borrowers since the global financial crisis of 2008 and 2009 (pictured, a Melbourne auction).
Aird also predicts three more cuts by the first half of 2025, which would see the RBA cash rate fall to 2.85 percent for the first time since December 2022.
The 150 basis points of easing over nine months would mark 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 will not completely undo the 425 basis points of rate increases between May 2022 and November 2023, when the Reserve Bank raised rates in November for the 13th time in 18 months.
This marked the most severe pace of monetary policy tightening since 1989.
Inflation plummeted 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 2 to 3 per cent target.
But Aird expects core inflation to fall back to the top of that band by mid-2024, when volatile items like oil are excluded.
This is well ahead of the Reserve Bank’s forecast that trimmed average inflation will fall to 3 per cent by June 2025, based on average price movements that exclude items where prices fluctuate wildly.
The Commonwealth Bank said rate cuts would be necessary by the end of 2024 to prevent unemployment from rising above 4.5 per cent.
“The transmission channel of monetary policy through the mortgage market is much more direct in Australia and we believe rate cuts will be necessary in the second half of 2024 to prevent the unemployment rate from exceeding 4.5 per cent,” said Mr. Aird.
Unemployment in January rose to a two-year high of 4.1 percent, up from 3.9 percent, and Treasurer Jim Chalmers blamed rising interest rates.
“This is also the inevitable consequence of higher interest rates, persistent inflation and global economic uncertainty,” Dr Chalmers said on Thursday.
But in New South Wales, where house prices are highest, unemployment rose to 4.1 per cent from a lower base of 3.4 per cent.
Commonwealth Bank Australian chief economist 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 national average of $624,383.
That means monthly mortgage payments are $5,100 compared to $3,900 nationally.
The typical new borrower in NSW would be paying for a $981,756 home with a 20 per cent deposit.
This is most likely a southwestern suburb of Sydney, where houses, while expensive, are still much more affordable than the $1.395 million median for greater Sydney, according to CoreLogic data.
In 2024, the Reserve Bank will hold eight two-day board meetings instead of 11 one-day meetings on the first Tuesday of every month except January.
In 2024, the Reserve Bank will hold eight two-day board meetings instead of 11 one-day meetings on the first Tuesday of every month except January (pictured, Governor Michele Bullock).
This will allow Australia to emulate the US Federal Reserve, which also meets eight times a year, with the RBA’s changes set to be legislated in 2024 following a review.
Unlike American borrowers, Australians cannot get 30-year fixed mortgage rates.
This meant Australian borrowers suffered a steeper rise in mortgage costs when ultra-low two-year fixed rates expired in 2023, causing monthly payments to rise sharply by 69 per cent.
“The average mortgage outstanding rate has risen much further in Australia,” Mr Aird said.