Anticipated Interest Rate Decline Under New RBA Governor

In approximately two months, when Michele Bullock assumes her role as the incoming Reserve Bank governor, borrowers might have already witnessed the last increase in interest rates. Rather than continuing with rate hikes, her leadership is expected to initiate a new cycle, with forecasts suggesting that Ms. Bullock will likely implement interest rate cuts shortly after taking charge.

Despite previous rate hikes, home prices have continued to rise. However, some relief may be in sight for borrowers, as certain economists predict that the cash rate will likely return to the low 3s by the end of 2024. This should provide some respite to borrowers who have experienced nearly a 60% increase in their monthly repayments since May 2022.

The announcement of Ms. Bullock’s appointment as the successor to the current RBA governor, Philip Lowe, came from Prime Minister Anthony Albanese and Treasurer Jim Chalmers. Philip Lowe is known for leading the fastest tightening cycle in a generation, having raised the cash rate by 4 percentage points in just 13 months. Nevertheless, economists speculate that the major work in this regard might already be accomplished by the time Ms. Bullock assumes her position.

The recent minutes of the July RBA meeting indicated a close decision to maintain the cash rate at 4.1%. The board considered both a pause and a 25-basis point increase but ultimately decided to keep the rate steady until the August meeting when they will reassess the situation.

The RBA acknowledged that further tightening might be necessary to bring infation back to target, but it will depend on the evolution of the economy and infation. Economists hold varying opinions on the future path of interest rates. While some expect one or two more rate hikes in August and September, followed by cuts in the next year, others anticipate earlier rate cuts, possibly beginning as soon as February. Leading economists from ANZ, Westpac, CBA, and NAB offer different perspectives on the expected cash rate, ranging from low 3s to 3.1% by the end of 2024.

For borrowers with variable home loans, the recent rate hikes have led to signifcant fnancial impacts. If the predicted rate cut to 3.1% occurs next year, it could save borrowers hundreds of dollars per month on their mortgage repayments, providing some relief from the current fnancial strain. However, the RBA minutes also caution that mortgage interest payments are already at a record high of 9.4% of income and may continue to rise, even without further interest rate hikes, as fxed-rate loans transition to higher variable rates.

While the rate hikes appear to be infuencing various aspects of the economy, there are still potential impacts to come from interest rates. The high proportion of fxed-rate mortgages has caused a delay in the full impact of the rate changes. As approximately 800,000 fxed-rate home loans are set to expire in 2023, the transition to higher interest rates could affect borrowers further. Nevertheless, economists believe that the rate decisions have already started to affect consumer spending, business conditions, and infation, with more impacts likely in the future.

In summary, under the new RBA governor Michele Bullock, interest rates are expected to decline, potentially bringing relief to borrowers facing increased mortgage repayments in recent times. Economists offer differing opinions on the future path of interest rates, but the RBA remains vigilant in assessing economic developments to determine the best course of action.