Mortgage holders in Australia may have to wait until next year for a reduction in official interest rates, and when it happens, banks may not fully pass on these cuts to consumers, aggregator Finsure Group has suggested.
Finsure CEO Simon Bednar (pictured left) noted that the Reserve Bank of Australia (RBA) is unlikely to reduce the cash rate from its current level of 4.35% this year, primarily due to ongoing inflation concerns.
“Inflation is still relatively higher than the RBA wants it to be, so I expect no change in 2024 as they solidify any gains made this year and not spark inflationary pressure prior to Christmas,” Bednar stated.
Bednar said the RBA will likely initiate its first rate cut in February 2025. However, he cautioned that banks are likely to withhold some of the reductions.
“I would strongly stress that banks then will not pass on any reduction in full. That means consumers and brokers will need to be realistic about how rate cuts flow into mortgages and the broader economy. Banks will be striving to recover margin quickly,” he said.
Since November of last year, the RBA has kept the cash rate steady after implementing 13 consecutive increases in response to soaring inflation, which rose sharply from a record low of 0.1% in May 2022.
Tim Lawless (pictured right), research director at CoreLogic Asia-Pacific, commented on the RBA’s decision to maintain the cash rate. He indicated that while the hold was widely anticipated, it may face scrutiny given that many Western nations, including the US, have recently lowered their rates.
“Australia hasn’t gone ‘as hard’ on monetary policy as most other Western nations,” Lawless noted, highlighting that Australia’s cash rate has increased by 425 basis points compared to larger hikes in the US and UK.
Lawless pointed out that Australia’s inflation rate, which stood at 3.8% in the June quarter, has decreased from a peak of 7.8% in late 2022 but still trails behind improvements seen in other countries. He emphasized that the RBA’s decision could positively affect consumer sentiment, with many households beginning to believe that rate hikes are over.
The structure of Australian mortgages could amplify the effects of the RBA’s decisions. Approximately 70% of Australian mortgages are on a variable rate, meaning adjustments to the cash rate are likely to have a more immediate impact on household budgets compared to the fixed-rate systems prevalent in countries like the US.
Lawless highlighted that the RBA remains cautious about inflation’s persistence, especially concerning service costs, which may not decrease as quickly.
What are your thoughts on the recent analysis? Share your comments below.
