The Commonwealth Bank's latest forecast predicts that interest rates in Australia will fall significantly in 2024 and 2025. The bank expects the Reserve Bank of Australia (RBA) to cut the cash rate by 0.75 percentage points over the 12 months starting in September 2024. This means that by the end of 2024, the interest rate may fall from the current 4.35% to 3.6%.
As for 2025, the Commonwealth Bank predicts that interest rates will fall another 0.75 percentage points as inflation returns to the Reserve Bank of Australia's target range of 21 to 31 percentage points. If this forecast comes true, the interest rate will fall to 2.851 percentage points by the end of 2025, which is slightly earlier than the Reserve Bank of Australia's expectations.
Why is there such an expectation?
Stephen Halmarick, chief economist at Commonwealth Bank, said that despite the many risks and challenges facing 2024, especially geopolitical risks and the US presidential election, the Australian economy remains in relatively good shape. He pointed out that although the Australian economy is losing momentum, mainly due to slowing household consumption, the pace of inflation decline is slower than in other countries.
Halmarick said: "The good news is that global inflation has slowed significantly since mid-2023, and we expect it to slow further in 2024. However, the market will also focus on the balance between restoring inflation to the 2% target and not causing too much damage to the labor market." He also said that as 2023 draws to a close, the market has shifted to believe that the global monetary policy tightening cycle has ended, and it is expected that some major central banks, especially the US Federal Reserve and the Reserve Bank of Australia, will cut interest rates in 2024.
Commonwealth Bank predicts that global inflation will decline significantly by the end of 2024, leading to market expectations that major central banks, particularly the US Federal Reserve and the Reserve Bank of Australia, will begin cutting interest rates. The bank projects Australia's annual inflation rate to fall back to 31% by the end of 2024, a forecast that is better than the Reserve Bank of Australia's current projections and closer to the federal government's latest forecasts. The Commonwealth Bank also anticipates the Reserve Bank of Australia will begin a moderate monetary policy easing cycle in September 2024.
How will interest rate cuts affect the property market?
In December 2023, the Reserve Bank of Australia finally kept interest rates unchanged, shielding borrowers from the impact of a sixth rate hike in 2023. In fact, Australian households have paid more than A$24,000 in additional interest due to 13 rate hikes since May 2022.
For those who own property, the expected interest rate cut will have a significant impact on their mortgage burden. If the interest rate drops from 4.35% in 2024 to 2.85% by the end of 2025, the mortgage burden of the house will be reduced, which is good news for Australians who are currently mortgaging their homes.
At the same time, interest rate cuts also make housing more affordable and may stimulate real estate market activity. However, it should be noted that in some popular areas, house prices may rise due to low interest rates, which may offset some of the savings from lower interest rates.
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