RBA to hold, but borrowers should still plan for a hike, not a cut

The Reserve Bank of Australia is expected to keep the cash rate on hold for the sixth consecutive meeting, continuing its ‘wait-and-see’ approach, after last week’s CPI results landed broadly as forecast.

Headline inflation rose from 3.6 per cent to 3.8 per cent annually, in line with RBA forecasts, however, trimmed mean inflation, the central bank’s preferred measure, fell for the sixth consecutive quarter, despite coming in marginally higher than expected by the RBA.

While this result keeps alive the possibility the RBA’s next move will be a cut, Governor Bullock is likely to once again, refuse to rule anything in or out at her post-meeting press conference tomorrow.

Borrowers should heed this likely warning by planning for another hike to be on the safe side.

Impact of another 0.25% pt rate hike before the end of 2024

Based on an owner-occupier variable borrower paying principal and interest

Source: RateCity.com.au. Notes: based on an owner-occupier paying principal and interest on the average variable owner-occupier rate of 2.86 per cent at the start of the hikes. Assumes a hike is in November 2024 and that the borrower has not renegotiated their rate since the start of the hikes.

How do other countries compare?

A growing list of central banks in other key economies have begun cutting official rates in recent months including two cuts by the Bank of Canada in June and July, one cut by the European Central Bank (ECB) in June, one from the Bank of England last week, and while the US Fed kept rates on hold at its meeting last week, it did signal that a cut is on the cards potentially as soon as September. 

While these jurisdictions are further advanced in their battle with inflation, it’s also important to note Australia is unique in terms of the number of mortgages on variable rates and the amount of debt mortgagors have. 

Official rates around the world

Source: RateCity.com.au. *Harmonised index of consumer prices (HICP). ^ ECB rate is the deposit facility rate. The ECB rates on the main refinancing operations and marginal lending facility are 4.25% and 4.50% respectively.  Note: cash rate can be referred to as policy rate or official rate in other countries.

Big four banks confident the next move will be down

Following last week’s CPI results, the big four bank economic teams have re-confirmed they expect the next move from the RBA will be down, not up, however, there is a difference of six months in their projections for the timing of the RBA’s next move.

Both CBA and Westpac expect the first cut will be in November of this year, while ANZ and NAB predict it will be in 2025, in February and May respectively.

Current big four bank cash rate forecasts

On a $600,000 mortgage a six-month difference in the timing of the first cut is significant.

RateCity.com.au research shows that if CBA and Westpac’s forecasts are correct and there are three cuts within the next 12 months, the average owner-occupier with $600,000 debt today would see their monthly repayments drop by $271. 

However, if NAB’s forecast is correct, and there is just one cut in the next year in May 2025, their repayments would only drop by $91 within the next year - assuming in both cases - banks pass cuts on in full.

Potential impact of big bank forecasts on a borrower’s finances

Based on a $600,000 loan with 25 years remaining

Source: RateCity.com.au. Notes: based on an owner-occupier paying principal and interest with 25 years remaining on their loan. Assumes hikes come in the last month of each quarter unless specified. Assumes rate cuts are passed on in full.

RateCity.com.au research director, Sally Tindall, said: “Last week’s inflation figures handed the RBA a get-out-of-jail-free card for this week’s meeting, but there’s still a long road ahead for the central bank and the country.” 

“The Board won’t be high fiving each other around the meeting room table, but rather breathing a sigh of relief,” she said.

“Trimmed mean inflation might have fallen for the sixth consecutive quarter, but at an annual rate of 3.9 per cent, it’s above the RBA’s own forecast and still a long way from its target of 2.5 per cent. 

“There’s no guarantee we’re going to get there without another hike.

“Plenty of economists expect the next change to the cash rate will be down, not up, and while this may well eventuate, if you’ve got a mortgage, put the idea of rate cuts out of your head and plan for another hike, just in case.

“Getting a rate hike you hadn’t planned for isn’t quite the same as getting a cut you weren’t expecting. It can have disastrous consequences for those already living in the red.

“You can do this by asking your bank for a rate cut. If they agree, keep your monthly repayments exactly the same, that way you’ll have immunity against a hike, should one eventuate. It’s that easy,” she said.

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