RBA expected to give mortgage holders ‘breathing capacity’ on interest rates

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The Reserve Bank is expected to give "breathing space" to households with mortgages by lowering the official cash rate for the first time since the early days of the Covid pandemic.

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A former Reserve Bank board member, Warwick McKibbin, stated there's likely to be a rate cut, although it's not in line with his personal views on how the central bank should act.

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“Considering the uncertainty in the global economy and the fact that core inflation is outside the target range, I reckon the RBA should keep rates steady,” said McKibbin, who is now the director of the Australian National University’s centre for applied macroeconomic analysis.

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“However, taking into account the recent inflation data trends, it's likely they will reduce interest rates.”

A 25 basis point drop in the mortgage rate would save a household with a $750,000 loan $115 a month, says Canstar's analysis.

Moses Samaha, the executive general manager at credit reporting agency Equifax, said the effect of a cut could take up to nine months to result in changed spending habits, as people are dealing with heaps of other high living costs.

“Cutting interest rates would just give us the space to manage everything else,” Samaha said. “In terms of seeing a real shift, we’re looking at a timeframe of about six to nine months.”

According to Equifax data, it's been found that historically it can take up to six months for interest rate cuts to influence a change in consumer spending habits.

The official cash rate has been locked in at a high 4.35% since November 2023, a time when inflation was running hot and living expenses were increasing rapidly. The last time the rate was dropped was back in November 2020, as part of a plan to give the economy a boost after it had been hit hard by the pandemic.

They say this scenario doesn't need a trigger, and it's possible for inflation to kick in.

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If the RBA surprises the market by keeping rates steady, the Coalition will have a strong argument to say the Labor government hasn't managed inflation well enough to get interest rate relief.

Charu Chanana, the chief investment strategist at Saxo, said the RBA could bring down the interest rate with "hawkish" comments, referring to policymakers who want higher rates to keep inflation in check.

“G'day, the potential scenario here is that, even with a 25 basis point cut, the RBA will keep a very cautious, very hawkish tone,” Chanana said.

“Plus, the market is currently pricing in three rate cuts in 2025, which seems a bit over the top, so the RBA will need to bring that back down.”