As published in realestate.com.au by Sarah Dowling

By the time incoming Reserve Bank governor Michele Bullock delivers her first interest rate decision in just over two months, borrowers may have already seen the last hike.

Instead, her leadership could mark the start of a new cycle with forecasts Ms Bullock will cut interest rates within months of taking over the top job.

Some economists expect the cash rate will return to the low 3s by the end of 2024, providing some relief for borrowers who have seen their monthly repayments jump almost 60% since May 2022.

Prime Minister Anthony Albanese and Treasurer Jim Chalmers announced on Friday that Ms Bullock would take over from current RBA governor Philip Lowe when his seven-year term expires in mid-September.

While Mr Lowe will be remembered by many for delivering the fastest tightening cycle in a generation – lifting the cash rate 4 percentage points in the space of just 13 months – economists anticipate the heavy lifting may be done by the time Ms Bullock takes the reins.

The outlook for interest rates

The minutes of the July RBA meeting, released Tuesday, showed it was a close call to hold the cash rate steady at 4.1%, with the board considering both a pause and another 25 basis point increase.

“Noting both the uncertainty around the outlook and the significant increase in interest rates to date, members agreed to hold the cash rate steady and reassess the situation at the August meeting,” the minutes said.

The RBA noted further tightening “may be required” to bring inflation back to target within a reasonable timeframe but said it depends on how the economy and inflation evolve.

ANZ believes the RBA may already be finished with its hiking cycle, saying an extended pause at 4.1% is now most likely, with cuts pencilled in for the end of 2024 due to “both a higher unemployment rate and confidence inflation is returning to the band.”

“The RBA has now paused twice in the past four months,” ANZ head of Australian economics Adam Boyton said.

“While the labour market remains tight, consumers’ unemployment expectations, business forward orders and job ads collectively suggest a modest uptrend in the unemployment rate over coming months.”

Westpac is forecasting a further two rate hikes to a peak of 4.6%, but sees cuts earlier than ANZ, by the middle of next year, with the cash rate tipped to end 2024 at 3.85%.

“We confirm our call that, following the hikes in August and September, rates will remain on hold until May next year when conditions will allow the Board to begin easing,” Westpac chief economist Bill Evans said.

CBA and NAB anticipate even heavier cuts, with both forecasting a cash rate of 3.1% by the end of 2024 – a full percentage point lower than where it sits today.

CBA head of Australian economics Gareth Aird expects the first cut will take place within months of Ms Bullock taking over as governor, with 50 basis points of cuts by March, followed by three more cuts over the rest of the year.

“We believe policy easing will be required of this magnitude over 2024 to avoid the unemployment rate lifting back to 5.0% - around the level it sat pre-pandemic,” Mr Aird said. 

“It is possible that the RBA leaves policy on hold for an extended period in 2024 if inflation proves hard to return to target and unit labour costs don’t decelerate enough.”

What that means for borrowers

Households that locked into ultra-low fixed rate mortgages during the pandemic have been shielded to the rate hikes so far, but for those with a variable home loan, the financial hit has been significant.

Since the first hike in May 2022, a borrower with $500,000 outstanding on their mortgage has seen their repayments jump by more than $1,200 a month on average, or around 58%, assuming their lender passed on each hike in full.

If the cash rate fell to 3.1% next year, as forecast by CBA, that would free up around $327 a month for that same borrower, lowering the total hit to around $882 – assuming their lender passes any cuts on in full.