Incredible interest rates prediction ahead of major RBA decision: 93 per cent certain
RBA Governor Michele Bullock will reveal what will happen with interest rates on February 18. (Source: Getty)
Money markets are almost completely sure next week will see the Reserve Bank of Australia (RBA) cut interest rates. After sitting at 4.35 per cent for more than a year, many leading economists and experts strongly believe there will be at least a 0.25 reduction in the official cash rate next Tuesday.
These markets, which are a section of the economy where participants can lend and borrow short-term, high-quality debt securities, are 93 per cent certain about this prediction. Motley Fool’s chief investment officer Scott Phillips told Yahoo Finance that now is likely the most reasonable time for a rate cut.
“It seems that, in all measures, inflation keeps coming down, and I suspect that, if I’m the RBA, the clear favourite is February,” he said.
“There seem to be no strong reasons for the idea to keep rates on hold unless they’re worried about inflation not being able to be sustainably low. And there’s an argument for that, but there’s not a lot of evidence for it.”
The move will be welcome news for millions of homeowners who have been struggling against a cost-of-living crisis along with interest rates at a 13-year high.
A poll of 4,200 Yahoo Finance readers found that 19 per cent would have to sell their homes if the RBA didn’t decide to cut rates next week.
The certainty around the February rates meeting stems from position inflation numbers released at the end of last month that showed the battle was being won.
Australia’s annual inflation figure came in at 0.2 per cent for the December quarter and 2.4 per cent annually, according to the Australian Bureau of Statistics.
Underlying inflation, which is the RBA’s key metric for interest rates, slowed to 0.5 per cent in the quarter and 3.2 per cent annually.
That’s the lowest it’s been in three years and is just on the cusp of the RBA’s 2-3 per cent target zone for inflation.
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The figures even beat the RBA’s expectations, with the central bank predicting underlying inflation to come in at 3.4 per cent.
Economist and Yahoo Finance contributor Stephen Koukoulas said the RBA would be mad if it didn’t begin its rate-cutting cycle this month.
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“And by an interest rate cutting ‘cycle’, it means a series of interest rate cuts from the RBA through the course of 2025 and possibly into 2026,” he said.
“As the saying goes, interest rate cuts are like cockroaches – there is never just one of them.”
Following the release of the December quarterly figures, two of the Big Four Banks adjusted their predictions for the next rate cut.
Commonwealth Bank (CBA) and ANZ had earmarked February as the first time homeowners would see mortgage relief, and was quickly joined by NAB and Westpac.
Westpac’s chief economist Luci Ellis said the inflation numbers were incredibly positive.
“With trimmed mean inflation at 0.5 per cent in the quarter (3.2 per cent year), we have just enough evidence to conclude that disinflation has proceeded faster than the RBA expected, so the board will have the required confidence to start the rate-cutting phase in February,” she said.
NAB chief economist Alan Oster added: “The Q4 CPI confirms that inflation has moderated more quickly than the RBA expected and sets up a likely downward revision to the inflation profile in the February statement on monetary policy.
“This now makes February the most likely starting point for a gradual easing in interest rates.”
While the Big Four banks are united on a February cut, they are split on the number of interest rate cuts to come in this year’s rate-cutting cycle.
Here’s what they predict:
Koukoulas revealed that for each 25 basis point interest rate cut, someone with a $500,000 mortgage holders could expect to save $96 a month in repayments.
“This saving is multiplied each time the RBA cuts rates by 25 basis points. Four 25 basis point interest rate cuts will save approximately $385 a month on a $500,000 mortgage,” he said.
Canstar has calculated the following monthly repayment savings:
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$600,000 loan: $92 per month
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$750,000 loan: $115 per month
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$1,000,000 loan: $154 per month
This is based on an owner-occupier paying principal and interest on the average variable rate of 6.33 per cent, with 25 years remaining on the loan.
While banks generally follow cash rate movements, there is no guarantee they will.
Of the 10 RBA rate cuts over the past 10 years, Canstar found only four were passed on in full by CBA, NAB and ANZ, with Westpac only passing on two.
If the RBA doesn’t cut interest rates next week, the central bank will meet again between March 31 to April 1.
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