When are interest rates expected to drop? [UPDATED]

From May 2022, the Reserve Bank of Australia (RBA) began one of the most aggressive monetary tightening periods in Australian history as it tried to curb soaring inflation.

But with several months of cash rate pauses by the RBA, many believe the tide may have turned.

So, now the question on everyone’s lips is: when will interest rates come down in Australia?

While there’s no crystal ball to predict exactly what the RBA will do next year, there is growing speculation that interest rates will come down in 2024. Let’s see what the experts are predicting.

What the Big Four banks and bond markets are saying [Updated November 2023]

• Commonwealth Bank expects that the Cash Rate has already peaked and should reduce to 2.85% by May 2025.

• Westpac is banking on a more gradual decline, and expects that the Cash Rate has already peaked and should reduce to 2.85% by December 2025.

• NAB is anticipating a further 0.25% rate increase by February 2024. It then anticipates the Cash Rate will return to around 3.10% by February 2026. (NAB was the only Big Four lender to correctly predicted the November rate increase).

• ANZ expects that the Cash Rate has already peaked and should reduce to 3.85% by June 2025.

ASX Futures - However, in stark contrast, traded ASX futures implies that that Cash Rate will only reduce to 4.15% by April 2025.

(See aside futures yield curve).

Source: https://www.asx.com.au/markets/trade-our-derivatives-market/futures-market/rba-rate-tracker

Bond market - Furthermore, the interest rates offered on traded long term Australian government bonds implies that the future longer term average interest rate will not be significantly lower than now. In fact, it may be higher. (See aside yield curve).

We consider that there is a risk that interest rates stay higher than the Big Four's forecasts.

The consequence of over 4% interest being offer on governments bonds may also have negative implications on property prices in investment ownership dominated property markets where the supporting fundamentals for capital growth is uncertain.

It’s important to remember that the predictions above are not a guarantee. Unforeseen events like changes in global economic conditions or domestic policies can impact cash rate decisions.

What about inflation?

The RBA has been trying to get inflation back within the target range of 2-3%. In recent months, we’ve seen inflation coming down, so it appears things are on track.

According to the RBA, headline inflation is expected to decline to 4.5% by the end of 2023 and to reach 3% by mid-2025.

What you can do as a borrower

Stay informed

Make sure you keep across the news so that you are up to date with the RBA’s cash rate decisions.

Next year the RBA is changing things up, following recommendations from the review of the central bank. There will be eight cash rate decisions instead of 11. Four of the meetings will be on the first Tuesday of February, May, August and November. The other four meetings will be held midway between these meetings (dates to be confirmed).

Regularly review your home loan

With interest rates potentially on the move, it’s important to review your home loan. It’s especially true if you haven’t had it checked in the last two years.

Ask us for a home loan health check and we’ll explain how your current loan measures up in today’s mortgage environment, along with if refinancing could be right for you.

Like to talk through your options?

Maybe you’re thinking about buying a property once interest rates come down. Talk to us about how a drop in interest rates could affect your borrowing capacity and what you can do now to prepare for a property purchase in the near future.