The Reserve Bank of Australia is expected to issue seven rate cuts between 2024 and 2025, according to a new forecast from Westpac, but not before the cash rate reaches a high of 4.1 per cent.
In an economic report issued this week, the bank predicted that the RBA will begin cutting rates from March 2024, with the economy to start stagnating later in 2023.
The RBA was expected to raise rates three more times (including in March) until they reached 4.1 per cent before pausing, Chief Economist Bill Evans said.
“At 4.1 per cent, the cash rate will be in deeply contractionary territory and a pause will be appropriate,” he said.
“The decision to pause will be with a reasonable view that the tightening cycle has peaked.
“Westpac concurs and expects that the next move in rates beyond mid–2023 will be the beginning of an easing cycle in the March quarter 2024.”
The official cash rate would then drop to a low of 2.35 per cent by 2025, the bank predicted.
“Over the course of 2024 and 2025, we see 175 basis points of cuts to a low of 2.35 per cent where the cash rate is expected to settle, with growth at trend and inflation at the top of the 2–3 per cent (per year) range,” Mr Evans said.
The bank had previously forecast the cash rate would peak at 3.85 per cent in May this year.
CBA predicts there will be two more hikes (including in March) while NAB and ANZ expect three more.
Westpac’s updated forecast comes as most experts tip a 25 basis point increase to the cash rate at the March RBA meeting.
Analysis by RateCity shows that a 0.25 percentage point rise would mean the average borrower with a $500,000 loan at the start of the hikes last May, could soon be paying $983 more a month on their mortgage.
RateCity Research Director, Sally Tindall, said that despite a promising fall in inflation figures in January the RBA was likely to push ahead with further rate increases.
“The latest inflation figures will be music to the RBA’s ears, but the Board is not going to change tack based on one month of data,” she said.
“The Board still has a long way to go to get inflation back under 3 per cent and that means more rate hikes are on the way.”
She urged borrowers and mortgage holders to approach their finances on the assumption that the official cash rate would push into the 4 per cent range.
“While no one knows exactly how high rates will climb, work out what another three hikes will look like in your budget, if not more. A cash rate in the ‘4s’ isn’t a certainty, but borrowers should be prepared,” she said.
She also cautioned mortgage holders not to place too much faith in Westpac’s forecast of a rate reduction beyond 2023.
“While this would provide borrowers with immense relief, people should not bank on this happening for certain,” she said.
“If the last couple of years has taught us anything, forecasts can change.”
