Why the Commonwealth Bank predicts Aussies with a mortgage will get three rate cuts by Christmas with more relief coming in 2025

Australia’s biggest home lender is now expecting borrowers to get three rate cuts by Christmas and more relief in 2025.

The prospect of six cuts by the middle of next year would mark the most generous concessions to mortgage holders since the Global Financial Crisis in 2008 and 2009, and the first relief since the Covid pandemic in 2020.

The highest unemployment rate in two years has triggered suggestions the Reserve Bank will have to start being kinder to borrowers to stop jobless figures from climbing too high. 

The Commonwealth Bank’s head of Australian economics Gareth Aird is now expecting the Reserve Bank to ease monetary policy in September, November and December this year.

‘Our base case sees the RBA commence an easing cycle in September 2024 – 75 basis points of rate cuts by end-2024 and a further 75 basis points of cuts in the first half of ’25,’ he said.

This would see the RBA cash rate fall from an existing 12-year high of 4.35 per cent to 3.6 per cent by December for the first time since May 2023.

Mr Aird is also predicting three more cuts by the first half of 2025, which would see the RBA cash rate fall to 2.85 per cent for the first time since December 2022.

The 150 basis points of easing in nine months would mark the most generous relief for home borrowers since the Reserve Bank cut rates by 425 basis points in 2008 and 2009 during the Global Financial Crisis.

It would also mark the first relief since November 2020, when rates were cut to a record-low of 0.1 per cent during the Covid pandemic. 

But it won’t completely undo the 425 basis points of rate increases between May 2022 and November 2023 – when the Reserve Bank raised rates for the 13th time in 18 months.

This marked the most severe pace of monetary policy tightening since 1989. 

Inflation plunged from a 32-year high of 7.8 per cent at the end of 2022 to a two-year low of 4.1 per cent in late 2023.

The consumer price index, also known as headline inflation, is still well above the Reserve Bank’s 2 to 3 per cent target.

But Mr Aird is expecting underlying inflation to fall back to the top of that band by mid-2024, when volatile items like petrol are excluded.

This is much earlier than the Reserve Bank’s forecast of trimmed mean inflation dropping to 3 per cent by June 2025, based on average price movements that exclude items where prices fluctuate wildly. 

The Commonwealth Bank said rate cuts would be needed in late 2024 to stop unemployment rising above 4.5 per cent.

‘The monetary policy transmission channel via the mortgage market is much more direct in Australia and we believe rate cuts will be required in the second half of ’24 to stop the unemployment rate from rising above 4.5 per cent,’ Mr Aird said.

Unemployment in January rose to a two-year high of 4.1 per cent, up from 3.9 per cent, with Treasurer Jim Chalmers blaming interest rate rises.

‘This is also the inevitable consequence of higher interest rates and persistent inflation and global economic uncertainty,’ Dr Chalmers said on Thursday.

But in NSW, where houses prices are higher, unemployment surged to 4.1 per cent from a lower base of 3.4 per cent. 

This is the state where the average new mortgage of $785,405 is significantly higher than the record-high national average of $624,383, Australian Bureau of Statistics figures show.

That means monthly mortgage repayments are $5,100 compared with $3,900 nationally, based on a 6.79 per cent Commonwealth Bank variable rate.

The typical new borrower in New South Wales would be paying off a $981,756 home with a 20 per cent deposit.

This would, most likely, be in a suburb of outer south-west Sydney where houses, while dear, are still much more affordable than greater Sydney’s $1.395million median, based on CoreLogic data.

The Reserve Bank in 2024 will be holding eight, two-day board meetings instead of 11 one-day meetings on the first Tuesday of each month, bar January. 

This will see Australia emulate the US Federal Reserve, which also meets eight times a year, with the RBA changes to be legislated in 2024 following a review. 

Unlike American borrowers, Australians aren’t able to get 30-year fixed mortgage rates. 

This meant Australian borrowers have suffered a steeper rise in mortgage costs when ultra-low, two-year fixed rates expired in 2023, leading to an abrupt 69 per cent surge in monthly repayments.

‘The average outstanding mortgage rate his risen by a much more significant amount in Australia,’ Mr Aird said.