The Reserve Bank of Australia's (RBA) recent rate hike cycle has left many homeowners, investors, and economists wondering: When will interest rates finally come down?
Just like most economists got their forecasts wrong as interest rates rose, it's likely forecasts when rates will fall will also be wrong.
However, recently the big four banks have all cast their predictions for the next few years of cash rate movements and 3 of them believe the cash rate has peaked.
Of course, it is possible that unforeseen events, such as changes in global economic conditions or domestic politics, may impact interest rate decisions in ways that are difficult to predict.
These are the interest rate predictions from experts after the August 2023 RBA decision to hold rates steady:
|Expert||How High Could The Cash Rate Go?||Cash Rate Peak - When?||What then for rates?|
|Bill Evans, Westpac||4.10%||Jun-23||dropping to 2.60% by the end of 2025|
|Gareth Aird, CBA||4.10%||Jun-23||dropping to 3.1% by the end of 2024|
|Alan Oster, NAB||4.35%||Nov-23||dropping to 3.10% by the early 2025|
|Felicity Emmett, ANZ||4.10%||Jun-23||Then one cut of 0.25% in late 2024|
Remember the RBA has raised rates to stifle inflation and we’ve come off the back of “wartime” stimulatory interest rates that got us through the pandemic.
When announcing its decision not to lift the cash rate in August, the RBA also made four interesting forecasts:
- That inflation will continue to decline,
- Our economy will keep growing,
- Unemployment, while rising will remain low, and
- Wages and salaries will rise.
In other words, Dr Lowe is forecasting economic growth and no further interest rate rises.
Then, once inflation falls into the RBA’s preferred band of 2-3% they will have to find that Goldilocks level of interest rates that are not too low to be stimulatory, but not too high to slow the economy.
Many commentators are suggesting this rate could be in the order of 3.25% to 3.5%.
In a recent insightful article journalist Tarric Brooker suggested the answer to what’s ahead for interest rates may lie in the patterns and history of Australian interest rates over the past six decades.
Brooker explained that since 1963, the RBA has implemented 11 rate cut cycles, with variability in the degree and duration of the cuts.
These have ranged from a mere 0.25 per cent reduction in 1972 and 1975 to a striking 8.25 per cent decrease between 1990 and 1993.
Historically, the overall average duration of an RBA rate cut cycle is 24 months from peak to trough.
On average, interest rates have remained at their cyclical peak for about 9.8 months over the past 50 years.
Brooker explains that the variability in interest rate cycles demonstrates that predicting the precise path of Australian interest rates is far from an exact science.
However, he suggests that it is possible to gain insights by analysing the past cycles.
⦁ Impact on Mortgage Repayments: The effect of rate cuts on mortgage repayments has varied over time. The average reduction in mortgage repayments across various cycles has been 18.0 per cent.
⦁ Duration of High Rates: The duration that rates have remained high after the peak has varied widely. The shortest time was just three months in 2008, while the longest was 16 months after the 1986-1987 rate rise cycle.
⦁ Rate Cut Degrees: The degree of rate cuts can have varying effects on the economy and borrowers, as seen in the difference between the 0.25 per cent cut in 1975 and the 8.25 per cent cut in the 1990s.
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Brooker suggests that based on historical patterns, there are projections for what future rate cuts might look like:
⦁ Average Scenario: If we experience an average rate cut cycle, mortgage rates could fall to around 5.0 per cent from the anticipated peak of 6.5 per cent.
⦁ Extreme Scenario: If the rate cut cycle were to resemble the one following the 1990s recession, mortgage rates could plummet to around 3.35 per cent.
However, it's important to recognise that history may not repeat itself exactly, especially considering the unique economic conditions and challenges posed by the recent pandemic.
Estimating how much interest rates will eventually be cut is defined by uncertainty and unprecedented economic conditions.
The RBA cash rate's unique positioning before the pandemic and the current rate rise means the usual pattern might not apply according to Brooker.
In fact, he suggests that this situation might not provide the same relief from higher mortgage rates as seen in previous cycles.
Note: The RBA's decision on cutting interest rates remains shrouded in complexity and unpredictability.
Historical data can provide valuable insights, but the unique nature of our current economic environment should not be underestimated.
For those closely following the property market or looking to invest, keeping a keen eye on economic indicators and staying abreast of RBA's announcements will be key.
The days of sub 3.25 per cent mortgage rates may be behind us, but understanding the context and being prepared for future changes can help navigate the uncertain waters ahead.