Westpac predicts that the Reserve Bank will make seven interest rate cuts in 2024 and 2025. However, before that happens, Westpac expects three more RBA rate hikes in March, April, and May, which would take the cash rate to an 11-year high of 4.1%. Borrowers have already had to endure nine consecutive monthly RBA rate increases since May last year, with three more hikes expected to push the cash rate to its highest level since early 2011.
After the three expected RBA hikes, Westpac’s chief economist, Bill Evans, predicts that the Reserve Bank will begin cutting interest rates by the end of March 2024. The first cut of a quarter of a percentage point would take the cash rate to 3.85%, followed by two more cuts in June and September of the same size, bringing the rates back to where they were at 3.35%. After that, there would be a series of cuts, with rates reaching 2.35% by the end of September 2025.
If Westpac’s prediction is accurate, the seven rate cuts would reduce the monthly repayments on an average $600,000 mortgage by $643. However, the severe Reserve Bank hikes have already increased the monthly repayments for borrowers with an average $600,000 mortgage by 42% to $3,284. Another three rate rises would add another $283 to monthly repayments, taking them to $3,567.
Inflation surged by 7.8% last year, which is beyond the RBA’s target range of 2-3%. Westpac expects inflation to drop to 4% by the end of 2023 and to 3% by the end of 2024, allowing for a policy response to a stagnating economy by the first quarter of 2024. The RBA is not expecting inflation to fall to 3% until the June quarter of 2025.
Last year, wages rose by 3.3%, the fastest pace in a decade. However, salary increases are lagging behind the high inflation rate, which means Australian workers are suffering a cut in real wages. Westpac predicts that by June, the Reserve Bank will most likely decide to stop raising rates, which would be the first month with no increase since April 2022.
Westpac’s prediction of seven rate cuts would be occurring after 12 straight monthly increases, resulting in a net increase of five hikes compared with early May 2022 before the RBA tightened monetary policy for the first time since November 2010.
