Last week was a big one for global interest rates. As expected, the US Federal Reserve elected to cut rates for the first time in years.
The central bank reduced its benchmark interest rate by half a percentage point. This was the first and the largest cut it has made since March 2020 when COVID-19 was crippling its economy.
The US Federal Reserve also signalled that it expects to cut rates by a further half a percentage point this year. After which, a further four more cuts are expected in 2025 and two in 2026.
But where does this leave the Reserve Bank of Australia (RBA) ahead of next week's cash rate meeting? Let's see what the economics team at Westpac Banking Corp (ASX: WBC) is saying about Australian interest rates.
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Will the RBA cut interest rates next week?
Unfortunately for borrowers, Westpac doesn't believe Australia's central bank will take any action at next week's meeting.
Commenting on US rate cuts, Westpac's Head of International Economics, Elliot Clarke, said:
The decision to cut by 50bp certainly emphasises that the global policy cycle has turned and central banks are increasingly mindful of the downside risks for growth and the labour market, as well as keeping inflation on its path back to target. But each country needs to proceed based on their individual circumstances.
Clarke doesn't appear to believe that the time is right to cut rates given the strength of the labour market and its potential impact on inflation. He adds:
Australia's labour market continues to show strength with employment growth keeping pace with historically elevated population growth and record labour force participation. While that remains the case, inflation risks will remain more probable and thus the RBA's focus.
Westpac also highlights that the RBA did not increase interest rates as high as in other countries in response to the inflation surge that emerged after the world opened up from lockdowns. In fact, even after this week's bumper cut, the US fed funds rate remains higher than the RBA cash rate.
When will rates fall?
The good news for mortgage holders is that it may not be too long until interest rates start to fall.
Westpac notes that money markets still see around an 80% chance that the RBA cuts rates before Christmas. Though, it concedes that all the signals coming from the central bank suggest a move is off the table until 2025.
As things stand, Westpac expects the cash rate to remain at 4.35% for the rest of the year.
After which, it expects cuts to 4.1% by March 2025, 3.85% by June 2025, 3.6% by September 2025, and then 3.35% by December 2025. Westpac then expects rates to stay at this level for the remainder of its forecast period (through to December 2026).
All in all, relief is on the way for borrowers, but they may need to be patient and hold out until early 2025.
