It’s the interest rate-cutting decision that’s spurred questions as to whether the Reserve Bank of Australia (RBA) should follow suit.
What is widely considered the most powerful — and influential — central bank, the US Federal Reserve, on Thursday cut interest rates by half a percentage point — .
Its key lending rate now sits between 4.75 and 5 per cent.
The RBA, however, has been adamant about sticking to its current interest rate of 4.35 per cent, ruling out any cuts in the near future, arguing that .
When can we expect RBA to cut rates?
The Australian Securities Exchange’s (ASX) RBA rate tracker puts the chance of a rate cut at the central bank’s board meeting on Tuesday at just 10 per cent.
And the majority of the big four banks do not anticipate any rate cuts before the end of the year.
Only the Commonwealth Bank forecasts a rate cut in December — revising it from November on Tuesday. It cited steady employment figures and the RBA’s reluctance to lower rates.
“Australia’s big four banks’ economic teams expect the next move to the cash rate in Australia will be a cut,” said Sally Tindall, the data insights director at financial comparison website Canstar. “However, the timing and the number of cuts varies between three and five in total.”
After its Tuesday meeting, the RBA’s board will meet in November and then again in December.
The table displays the predictions of the Big four banks regarding the RBA’s rate cut. Source: SBS News
How will rate cuts impact Australian mortgage holders?
Explaining a key difference between mortgage holders in Australia and the US, Tindall said Australia’s cash rate at 4.35 per cent is still lower than the lending rates in the US.
“While the US Fed’s announcement of a 0.50 percentage point cut takes its target range for the federal funds rate down to somewhere between 4.75 and 5 per cent, even after this, official rates in the US are still 0.40 to 0.65 percentage points higher than Australia’s cash rate.”
She said rate cuts take longer to have an impact on US households compared to Australia, as the majority of borrowers are on long-term fixed rates.
“This is the opposite in Australia where the majority of borrowers are on variable rates and therefore feel the impact of a cash rate change within two to three months of it happening.”
How could lower interest rates impact homeowners?
If the RBA cuts rates by 0.5 percentage points, just like the US Federal Reserve, Australians with mortgages are likely to experience some financial relief after interest rates began rising in mid-2022.
On the average loan amount of $641,000, a cut of half a percentage point cut (the equivalent of two 0.25 percentage point cuts) could cut monthly repayments by $197 or as much as $2,400 in one year, according to Canstar’s estimate.
Here are a few scenarios to understand how much homeowners can expect to save if and when that happens:
The interest rate used in the table (6.36 per cent) is based on the RBA Lenders’ Rates for outstanding owner-occupier variable rate loans. Source: SBS News
Will homeowners be better off in the long term?
Certainly, provided rates decrease.
Tindall provided an example illustrating how a sustained decrease in interest rates by the RBA could improve mortgage holders’ financial situations by December 2025.
The table below shows how monthly repayments could drop by $357 before the end of next year for an owner-occupier paying principal and interest with a $600,000 debt and 25 years remaining if four cuts take place in 2025:
The table shows the likely impact of four cash rate cuts before December 2025. Source: SBS News
“Over the next 15 months, through to the end of 2025, they would pay $2,846 less interest to their bank compared to if there were no cuts,” Tindall said.
Why does the RBA want to hold off a rate cut?
In a bid to curb inflation.
Over the 12 months to the June quarter, the most recent Australian Bureau of Statistics data showed inflation in Australia rose to 3.8 per cent from 3.6 per cent in the March quarter.
The RBA’s target range is between 2 and 3 per cent, which is why the first interest rate cut is some time away till this key economic indicator is brought under control.
In May 2022, RBA’s interest rate was as low as 0.1 per cent. Since then, it has been increased by 0.25 percentage points each time to 4.35 per cent, where it has stayed since November 2023.
A graph shows an increase in RBA’s interest rate from May 2022 – Aug 2024. Source: SBS News
Speaking at an event on 5 September, RBA governor Michele Bullock said: “It is premature to be thinking about rate cuts. Circumstances may change, of course, and if economic conditions don’t evolve as expected, the Board will respond accordingly.”
“But if the economy evolves broadly as anticipated, the Board does not expect that it will be in a position to cut rates in the near term.”
Earlier this week, Treasurer Jim Chalmers commented on the US Federal Reserve’s rate cut decision, saying inflation in the US peaked much higher than in Australia and occurred earlier there than it did in Australia.
He defended the government’s efforts in driving inflation down from nearly 8 per cent when it was elected in 2022.
