While Australians can expect interest rate cuts after more than a year of severe mortgage pain
Westpac now expects to cut rates in May but increase rates in August, September
Westpac now expects the Reserve Bank to cut interest rates again in May next year – but only after inflicting further pain on borrowers.
Outgoing chief economist Bill Evans predicted the RBA would raise rates in August and September, taking the cash rate to a 12-year high of 4.6 percent.
But after that, he predicted that rates would be cut next year, taking the cash rate back to 4.35 percent — higher than the current 11-year high of 4.1 percent.
“The first rate cut in the next easing cycle will be next May,” he said.
By then, Philip Lowe may be replaced as Reserve Bank governor with his seven-year term ending on September 17 and a replacement may be announced as early as this week.
Westpac adjusted its forecast after predicting in February that the first of seven losses would begin in March 2024.
Westpac now expects the Reserve Bank to cut interest rates again in May next year – but only after further distressing borrowers (pictured is an auction in Sydney’s Paddington)
Just five months ago, Westpac predicted the RBA cash rate would peak at 4.1 per cent and seven rate cuts would bring it down to 2.35 per cent by September 2025.
But two more rate hikes than previously expected mean the Reserve Bank’s cash rate will return to 2.85 per cent instead, if Westpac’s forecast of seven rate cuts in 2024 and 2025 is realised.
Inflation eased to 5.6 percent in May, down from 6.8 percent in April, but was still above the RBA’s 2 to 3 percent target.
Nevertheless, the Westpac-Melbourne Institute consumer sentiment score rose 2.7 per cent to 81.3 points in July as inflationary pressure eased.
This reading was still below the 100 level where optimists outnumber pessimists.
Mr Evans said the RBA’s July rate cut, rather than a rate cut, had boosted consumer sentiment by moderating inflation, which still remains in deeply negative territory.
‘Confidence appears to have increased as a result of the significant fall in inflation,’ he said.
‘Consumers remain cautious about interest rate outlook despite RBA pause.’
By May next year, Philip Lowe is likely to be replaced as Reserve Bank governor and his seven-year term will end on September 17 (he is pictured in the center with assistant governor Lucy Ellis and former deputy governor Guy Debell in 2017).
The Reserve Bank’s 12 rate cuts from May 2022 are the most aggressive since 1989.
‘The key message is that sentiment is unlikely to make a sustained lift from current deeply pessimistic levels until inflation is much lower and interest rates are firmly held,’ Mr Evans said.
The survey of 1,200 Australians taken in the first week of July found that consumers expect house prices to rise, although they consider now a bad time to buy a property.
The reading on house prices produced a score of 149.3 points – over 100 points where optimists outnumber pessimists, after Sydney house prices rose two per cent to $1.32 million last month.
But the question whether now is the time to buy a home had a score of 76.4 points, in negative territory.
Mr Evans has been Westpac’s chief economist since 1991 but is being replaced in October by Reserve Bank assistant governor Lucy Ellis, in charge of economic research.