Major bank economists expect interest rates to drop next year – but they're pricing in further rises before then
Major bank economists have warned that while homeowners paying down their mortgage may get relief in the form of interest rate cuts by early 2024, more financial strain is likely to squeeze household budgets before then.
According to leading economists, the rapid rate rises of the past 15 months are expected to have the desired effect of slowing the economy, leading to potential interest rate cuts of more than 1% next year, The Australian reported.
However, the major banks are pricing in one or two additional interest rate rises in the coming months, following the recent surprise decision by the Reserve Bank of Australia to increase the cash rate by 0.25 percent.
In light of this, Commonwealth Bank anticipates falls of 1.25% to the cash rate in 2024, offering some respite to mortgage holders who have faced a 3% increase over the past 15 months. CBA expects the rate cuts to be front-loaded in the early part of the year, bringing the cash rate to 3.1%. CBA and ANZ both expect one further rate rise in August, after the release of quarterly inflation data, according to The Australian.
Read next: NAB survey reveals worrying signs of a slowing in business activity
HSBC chief economist Paul Bloxham shares this view, saying last week that the chance of a recession is now a coin toss as the economy slows down in response to an expected rate rise in August and potentially another one. He predicted that the cash rate would be cut to 3.5% by the end of 2024, The Australian reported.
National Australia Bank (NAB) has revised its outlook on the trajectory of rates, expecting rate rises of 25 basis points each in July and August, in response to stronger-than-anticipated inflation.
“While inflation has clearly peaked, and we (like the RBA) see inflation returning to the band by 2025, the extended period of inflation above target amidst a tight labour market poses the risk of stronger wage and price expectations becoming embedded,” said Alan Oster, NAB chief economist.
Meanwhile, the latest consumer survey by Westpac-MI reveals that most consumers anticipate further rate rises, with almost four in five respondents expecting rates to increase over the next year. Additionally, 48% of those surveyed are bracing themselves for an increase of one percentage point or more.
The survey also indicates that sentiment around home buying remains low, marking the most prolonged period of very weak buyer sentiment since the survey began in 1974, The Australian reported.
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