When will interest rates fall?

It's been more than two years since the Reserve Bank of Australia (RBA) began hiking rates, and it's fair to say many Australians are eagerly awaiting rate cuts. The evidence suggests this may not be too far off. 

September saw the RBA keep the cash rate on hold, and the central bank won't meet again until early November. So, barring an economic emergency, rates aren't expected to change for at least another month.  

Nevertheless, the signs look good for rates to soften in the not-too-distant future.  

Ironically, just 24 hours after the RBA Board met last month, the ABS published the latest monthly CPI figures showing inflation rose by 2.7% in the 12 months to August, down from 3.5% in July. 

Not only is this the lowest CPI reading since August 2021 but inflation of 2.7% is well within the RBA's preferred 2%-3% range.  

Will it be enough for a pre-Christmas rate cut? Maybe not. The RBA tends to rely on quarterly rather than monthly CPI figures.  

Still, it's a promising start, and the big banks are predicting rate cuts from early 2025. Commonwealth Bank is the outlier, forecasting rate cuts before year's end.  

The question is, how might borrowers, savers and investors be impacted? Let's take a closer look. 

Homeowners stand to benefit - but why wait? 

Around 70% of Australian mortgages have a variable rate, so when a rate cut does come, the savings should flow rapidly through to borrowers.  

But homeowners don't have to wait for the RBA to move. Several lenders have cut variable rates on at least some of their loans over the past few months but the real action has been among fixed rates. In the past week alone, 12 brands cut over 300 different fixed rates across owner-occupier and investor loans and there are now 112 fixed rates lower than the lowest variable rate, according to Canstar. 

Given expectations that rates will fall, now may not be the time to lock into a fixed rate. The exception could be if your current variable is very high, which could see a one-year fixed rate deliver valuable short-term savings. 

Savings accounts - it may be worth locking in 

Not everyone will benefit from rate cuts. While 37% of Australians have a mortgage, 30% own their home debt-free and 31% are renters. 

For many of these people, high interest rates have meant a chance to earn decent returns on savings. One option to protect those returns is to lock into a term deposit but you may need to act fast.  

Term deposit rates have cooled over recent weeks as expectations of rate cuts firm up. That said, at the time of writing, a number of providers including Defence Bank and G&C Mutual Bank are still paying around 5% on terms below one year. 

Residential property 

There's no doubt that home ownership has served Australians well. Household wealth rose for the seventh consecutive quarter in June, driven chiefly by rising property prices.  

Will rate cuts fuel further price growth? Not necessarily. Analysis by Ray White Economics suggests a rate cut could see home prices rise by 0.6% nationally. This could add an extra $5,000 to the average price of a home based on current median values. However, the outlook varies between locations.  

Sydney home prices could climb 1.4% in the first month following a rate cut, potentially adding an extra $15,300 to the average cost of a home. At the other end of the spectrum, Ray White Economics predicts we could see no change at all to prices in Perth and Darwin. 

Share markets 

More than seven million Australians directly own investments listed on the ASX and many more have an indirect investment through their super fund. So, it's natural for people from all walks of life to question how falling rates will impact share values. 

Let me say that despite a sluggish economy Australian shares have soared by more than 17% in the past year. Add in dividends, and the total return has been an impressive 22%. Of course, past returns are no guide for the future, and stock markets are notoriously unpredictable.  

Even so, it's fair to say that rate cuts resulting from inflation coming under control are likely to have a far more positive impact on share markets than rate cuts designed to stave off a recession. And while our economy grew by just 1.5% in 2023-24, it is still in positive territory.   

The thing is, history tells us that taking a long-term view with shares delivers the best results. The key is to hold your course unless your circumstances and goals have changed. 

One final word 

As we head towards the festive season, households will be under pressure to spend regardless of what's happening with interest rates.  

Credit reporting agency Equifax has expressed concern about the high rate of credit card applications ahead of the holiday season, with demand for credit cards jumping 9.6% over the year to August.  

This suggests more Australians are reaching for credit cards to manage household budgets. There is a worrying aspect to this. Equifax data from the past two years shows consumers who apply for credit cards in the final quarter of the year often use their card for festive spending and are more likely to fall behind on payments. 

The upshot is that rate cuts may be on the horizon. But keeping a close eye on your finances - and staying true to your long-term investment goals - remains as important as ever.