Time to read : 4 Minutes
Will they or won’t they cut the cash rate? It’s the question just about every Australian mortgage holder wishes they had a crystal ball to know the answer. But, we’ll need to wait for the decision when the Reserve Bank of Australia (RBA) meets for the first time this year – Tuesday 18 February.
The recent release of December’s Consumer Price Index (CPI) – the data that measures inflation – showed that in general inflation was dropping and jumps in the cost of living were slowing down.
That’s led to the four big banks and key economists to forecast the RBA is likely to cut the cash rate this month. But there are no guarantees that a cash rate cut means an interest rate cut. Gulp.
Let’s join the dots on how it’s all connected, with some help from our Head of Home Loans, Anton Stevenson.
How the Consumer Price Index comes into play
Every quarter the Australian Bureau of Statistics (ABS) releases the CPI figures. This measures whether the price Aussie households are paying for goods and services has gone up or down.
Data from the December quarter showed CPI at 2.4% – a drop from 2.8% in the September 2024 quarter.
There have been decreases across the last two quarters. CPI for the June quarter was significantly higher at 3.8%.
What does this indicate? It shows signs that economic growth has slowed down for two consecutive quarters and that gives some hope to mortgage holders – especially those on a variable rate – that the RBA could decide the economy is in a good enough shape to lower the official cash rate.
The other good news is that the trimmed mean inflation – the RBA’s preferred way of measuring inflation – has also dropped.
Trimmed mean inflation reduced to 3.2% in December 2024, from 3.6% in September.
It has slowly come down from a high 6.8% in December 2022.
What is trimmed mean inflation?
Without getting too technical, trimmed mean inflation is a way of measuring price changes in the economy for a clearer picture of inflation trends.
The way it works is a percentage of items with extreme or irregular increases or decreases in price are trimmed away. What’s left helps the RBA make more informed decisions as it’s a better general indicator of how the economy and cost of living is playing out.
What does the cash rate have to do with interest rates?
Firstly, in Australia the official cash rate is the interest rate set by the RBA for overnight loans between banks. It’s currently 4.35%.
The important thing to note here is that if the RBA cuts the cash rate, it doesn’t mean banks will definitely cut their home loan interest rates. (Many people think it’s a done deal)!
According to the RBA, banks and lenders decide on increases or decreases to interest rates based on:
funding costs
borrower competition
risk that borrowers do not repay loans.
Find out more about what influences banks' lending rates.
Yes, but… banks do strongly consider the cash rate when setting interest rates. And, all four major banks are tipping the cash rate will be cut which may be a sign they could be about to pass on an interest rate cut.
Interestingly, many lenders have been quietly gradually cutting their variable and fixed rates in recent weeks. This may suggest they think a cash rate cut is on the cards, as they did the opposite just before the RBA started hiking the cash rate.
What impact would an interest rate cut have on my mortgage?
This is the question every homeowner in Australia will be asking come 18 February.
An interest rate cut – even if it’s 0.25% – could reduce monthly repayments for those on a variable-rate and help ease financial pressure. It could also help with refinancing.
Here’s an example of how your repayments can change using the Moneysmart mortgage calculator.
Current average mortgage in Australia: $642,000.
Current average interest rate: 6.5%.
With a loan length of 25 years and no fees, your monthly repayments would be: $4,335.
Now... if your bank gave you a 0.25% rate cut:
Revised interest rate becomes: 6.25%
Your monthly repayments would drop to: $4,235.
That’s $100 back in your pocket each month or $1,200 in a year.
“For mortgage holders who attempted to refinance to a lower-rate product over the past two years but were turned down due to serviceability, a rate reduction could improve their ability to refinance. This has the potential to lower their rates and improve cash flow which is much needed in the cost of living crisis,” said Anton Stevenson, Head of Home Loans at Compare Club.
What does an interest rate cut mean for the property market?
It may be too soon to tell, but it could entice more buyers to finally get on the property ladder.
“An interest rate cut along with government initiatives and support could drive more market demand especially for first-time buyers.”
“Additionally, it could reduce serviceability buffers that banks use to manage credit risk which would give home loan applicants more borrowing power,” said Anton.
Of course, the flip side of this is more demand could put prices up. The property market is never an easy ride.
Bottom line
Without a crystal ball or a fortune teller, we’ll have to wait and see if the RBA cuts the cash rate and if the banks pass on interest rate cuts.
There’s no guarantee that rates will drop come mid-February but for financially stretched home owners, it’s a good time to start discussing refinancing options with a broker as the interest rates start to look a little less unpleasant.
Go deeper:
Can an offset account help you break up with your bank faster?
Why are home buyers choosing to borrow from non-bank lenders?
Financial Disclaimer
The information contained on this web page is of general nature only and has been prepared without taking into consideration your objectives, needs and financial situation. You should check with a financial professional before making any decisions. Any opinions expressed within an article are those of the author and do not specifically reflect the views of Compare Club Australia Pty Ltd.
