There has been a lot of speculation recently that interest rates may need to go higher before they go lower in an effort to tame inflation.
This would of course be very bad news for borrowers, which are already being squeezed by higher interest rates.
The good news, though, is that Westpac Banking Corp (ASX: WBC) continues to believe that the next move by the Reserve Bank of Australia (RBA) will be to take rates lower.
And the even better news that the first rate cut could be coming later this year and that there could be plenty more on the way.
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What is Westpac saying about interest rates?
According to the Westpac Weekly economic report, the bank's chief economist, Luci Ellis, hasn't seen anything to say that inflation will be heading in the wrong direction again. She said:
Households in Australia are collectively doing it tough. Their cash flows are being squeezed by the high cost of living, high level of interest rates and a rising tax take. Consumption per capita has fallen more than 2½% since the RBA started raising rates. Australia stands out from its peers on this front.
At the same time, inflation is too high and the labour market is tight, though not quite as tight as late last year. The labour force data for April confirmed this gradual easing, helping to cut through the noise of the first three months of the year. And the Wage Price Index release, also this week, shows that wages growth is starting to roll over from its recent peak, as was widely expected. To be fair, these are lagging indicators. But there is nothing in these data – or more leading indicators – pointing to even higher inflation pressures down the track.
When will rates go lower?
As things stand, Westpac is forecasting the RBA to make its first interest rate cut in December. This will see a 25 basis points cut to 4.1% (from 4.35% today).
After which, Westpac's economics team believes the central bank will then move swiftly with its cuts.
By March 2025, another 25 basis points cut to 3.85% is forecast and then by June rates are expected to fall to 3.6%.
But that's not where it ends. Westpac is tipping the RBA to then take interest rates to 3.35% by September 2025 and then finally 3.1% by December 2025.
In summary:
- Today: 4.35%
- December 2024: 4.1%
- March 2025: 3.85%
- June 2025: 3.6%
- September 2025: 3.35%
- December 2025: 3.1%
Overall, it seems that some relief could be on the way for borrowers in the not so distant future according to Westpac.
