What to expect from interest rates in the next year

The worst budget pain is yet to come for many households around the country, and many economists are not expecting interest rates to move from their current 12-year high for nearly a year.

In Reserve Bank governor Philip Lowe’s final meeting, the bank’s board decided to leave the official cash rate at 4.1 per cent for the third consecutive month as economic data shows inflation is still high but falling.

Some Australian households are yet to feel the worst of the economic pain.Credit: Nick Moir

Most economists expect incoming Reserve Bank governor Michele Bullock to keep interest rates at 4.1 per cent for the near future, but some expect the first cuts to be early next year while others believe it could be more than 12 months before homeowners see any reprieve.

Independent economist Chris Richardson said many Australians are yet to feel the worst of the economic pain.

“I think overall pain gets worse from here,” he said.

He noted the unemployment rate is expected to rise from its current rate of 3.7 per cent to 4.4 per cent by the end of next year, and those people who lose work will be the most badly affected.

Households still on ultra-low fixed-rate mortgage terms will take a financial hit when they roll onto higher variable rates in coming months, and the third most affected are those who received the federal government’s low and middle-income tax offset last year — known as the lamington — who will not get that cash injection this year now that program has ended.

”I think it’s the correct policy to have done away with the lamington, but that is a lot of money, — $11 or $12 billion — that was in pockets last year, in July, August, September, not in pockets this year,” Richardson said.

Richardson does not expect interest rate cuts to start until at least the end of next year, and one major reason for that is the economic stimulus coming on July 1, 2024 when the stage 3 tax cuts come into effect.

Those cuts will boost the take-home pay of all workers earning over $40,000 a year, but will predominantly benefit those earning more than $180,000.

“We’re 12 months and maybe more away [from rate cuts],” he said.

Not everyone agrees interest rate cuts will happen so late in 2024. Both the Commonwealth Bank and AMP are forecasting the first reduction in official rates in March, but AMP’s chief economist Shane Oliver acknowledges there are risks to that forecast.

“If as we expect the economy continues to weaken as past rate hikes increasingly bite, this will maintain downwards pressure on inflation, heading off any further rate hikes and ultimately allowing the RBA to cut rates next year,” he said.

“We are allowing for the first rate cut in the March quarter next year, albeit the risk is that this may be delayed if productivity remains poor, services inflation sticky and if home prices continue to surge.”

Westpac, NAB and ANZ all expect the first rate cut to come in the latter half of 2024. Westpac and NAB expect the first cut in August, while ANZ is forecasting the first cut in November.

ANZ’s head of Australian economics Adam Boyton said inflation is slowly moderating from its December peak of 7.8 per cent, but unlike the past where the Reserve Bank has struggled to get inflation up to its target range, we may be entering a phase where it struggles to get it low enough.

“There’s a possibility that interest rates might go up again, but it’s less than 50 per cent,” he said.

“So the most logical outcome is hold here at 4.1 per cent until we start a modest easing cycle at the end of next year.”

Despite the fact interest rates are likely to remain high for another year, Boyton is more optimistic about the outlook for households.

“Inflation acts as a tax on all of us that reduces spending power. And so if we can get inflation down, households will actually start to see an improvement in their financial situation through the course of next year,” he said.

“That should then flow on or, in particular to small businesses, as household spending picks up again.”

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