The RBA’s war on inflation inflicts $290 billion bill on home buyers

The Reserve Bank is poised to bring official interest rates below 4 per cent for the first time in more than two years as the bill paid by borrowers by the bank’s efforts to bring down inflation passes the quarter-trillion-dollar mark.

The bank’s monetary policy board starts its two-day meeting on Monday with financial markets expecting the cash rate to be sliced another quarter of a percentage point to 3.85 per cent.

Reserve Bank governor Michele Bullock is expected to announce a quarter percentage point interest rate cut this week.Credit: Jamie Brown

The last time it was under 4 per cent was in May 2023 when headline inflation was at 7 per cent and underlying inflation was above 6 per cent. Headline inflation has fallen to 2.4 per cent while underlying inflation is at 2.9 per cent.

On a $600,000 mortgage, a quarter percentage point cut would reduce monthly repayments by about $100. That’s on top of the bank’s February rate cut, which was also worth $100 a month on the same size loan.

The Commonwealth Bank’s head of Australian economics, Gareth Aird, said even though the nation’s jobs market remained tight, it appeared the RBA had brought inflation down and could afford to ease interest rate settings.

“Our view is that the proverbial inflation dragon has been slayed,” he said.

“The domestic data continues to make the case that the ‘soft landing’ has been achieved. And this will mean the RBA can continue to normalise the cash rate as we move through 2025 to a level it considers to be a more neutral setting.”

The full extent of the Reserve’s efforts to bring down inflation has been confirmed by new figures from the bank on the amount of interest paid by borrowers since it started lifting interest rates.

Australian home buyers paid out a record $20 billion in interest on their mortgages in the just completed March quarter. Over 12 months to March, they shelled out almost $80 billion in interest – a 159 per cent increase on the amount paid in the 12 months before the RBA’s first rate rise in May 2022.

Once the interest incurred by investors on their mortgages is included, Australian borrowers have paid almost $290 billion in interest on their home loans since 2022. In the three years before that, they paid $157.5 billion.

Even at 3.85 per cent, the Reserve Bank will consider monetary policy to still be restrictive, implying further interest rate cuts later this year and into 2026.

Key data last week which showed unemployment steady at 4.1 per cent despite a spike in jobs created in April and wages growth at 3.4 per cent were largely in line with the Reserve Bank’s economic forecasts, which will be updated on Tuesday.

EY senior economist Paula Gadsby noted that the figures – on top of the most recent inflation data – would give the Reserve Bank confidence it can cut rates now and in the second half of 2025.

“The Reserve Bank will likely be comfortable with both the labour market and the recent wages data as it considers loosening monetary policy at its board meeting next week,” she said.

Donald Trump on “liberation day”. Despite winding back the biggest tariffs, average American tariffs will climb sharply, hitting the US economy.Credit: Getty Images

“In addition to a likely interest rate cut next week, further cuts are certainly possible by the end of the year. The Reserve Bank will need to be alert to the downside risks associated with global trade developments and the impacts of uncertainty on consumption and business investment.”

A key factor has been the turmoil caused in the global economy by Donald Trump’s tariff war on the world. The RBA’s last interest meeting was held the day before Trump’s “liberation day”.

Financial market turmoil has eased in recent days given that the United States and China have wound back their huge tariff imposts on each other. Despite this, the US’s effective average tariff rate on all imports has climbed to an 80-year high, prompting concern about US economic growth and inflation.

Economists at the ANZ said a quarter percentage point rate cut this week was more likely than not. The ANZ had expected three cuts this year, starting in May and followed by further reductions in July and August.

They believe the bank will only move again in August, followed by a rate cut early next year.

“Easing in May is likely the ‘path of least regret’ for the RBA, given the uncertain global backdrop (notwithstanding the recent lift in equity markets) and encouraging inflation outcomes over the past two quarters,” they said.

“Looking beyond May, it is now harder to see the conditions that would be required for a July cut to eventuate over the near term.

“While there has been an impact on Australian consumer and business confidence, signs of progress in US-China trade talks have reduced the risk of a global shock having a more pronounced and immediate impact.”

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