What’s ahead for our mortgage rates?
We all want them to come down, but when will that happen?
In a recent article on news.com.au commentator Tarric Brooker concludes that the timing of rate cuts remains uncertain and the date could easily change.
So let’s see what can we expect to happen to interest rates now than inflation is heading in the right direction.
Historical context and RBA’s monetary strategy
Since November 2011, the landscape of Australia’s financial policy has undergone a significant transformation according to Brooker.
The Reserve Bank of Australia (RBA)’s cash rate nosedived from 4.75% back in 2011 to a historic low of 0.1% by November 2020.
Initially rates were dropped to stimulate the economy and push up inflation. (remember that!), but Brooker points out that while the steep decline in interest rates was especially pronounced during the COVID-19 pandemic, it was not an isolated move.
It was in fact part of a broader strategy, including yield curve control and providing substantial funding (about $188 billion) to banks at minimal costs.
This strategic shift led to a significant fall in the average three-year fixed mortgage rate to below 2% in 2021.
Of course, we’ve seen 13 rate rises since then to tame inflation caused by low interest rates and excess money creation, but now that inflation is under control, when will we see rate cuts?
Booker explains that typically there’s a lag of around 9.8 months (10.6 if we set aside the 2008 Global Financial Crisis) between the peak of mortgage rates and subsequent RBA rate cuts.
“If we follow this historical pattern and avoid a crisis akin to the GFC, we might see rate reductions around September”, said Brooker.
Historically, rates have stayed at their cyclical peak for a maximum of 17 months, hinting at an impending adjustment period.
The magnitude of potential rate cuts
Brooker’s analysis reveals that over the last 40 years, the average mortgage rate reduction is about 29.3%, influenced heavily by significant cuts during the early 1990s recession and the 2008-2009 GFC.
Excluding these exceptional periods, the typical cycle sees a reduction of around 22.8%.
Inflation, always a critical factor in the RBA’s considerations, has historically seen rate cut cycles start when it averaged around 4.43%, a bit higher than the RBA’s usual target range of 2-3%.
Without the distortions like the 2001 GST introduction, this figure drops to 3.87%.
Current market outlook and what’s ahead
Projecting into the future, Brooker suggests we might anticipate a rate cut at the RBA’s September meeting, aligning with forecasts from major banks like Commonwealth Bank and Westpac.
In contrast, ANZ and NAB are leaning towards a November timeline.
However, Shane Oliver of AMP offers a different perspective.
He hints at possible cuts as early as June, though acknowledging risks of delay until August or September.
This is influenced by recent trends in the labour market, including a rise in unemployment rates to 4.1%, the highest since early 2022.
