Reserve Bank could deliver shoppers plenty of pre-Christmas cheer

Home buyers could be delivered a financial windfall just in time for Christmas as markets and economists grow increasingly confident the Reserve Bank will deliver a string of interest rate cuts to protect the economy.

Softer-than-expected growth figures, ongoing signs that inflationary pressures are moderating, and concern over the impact of US President Donald Trump’s tariff war have sharply lifted market expectations of a rate cut when the RBA next meets in early July.

Home buyers could have hundreds of dollars extra in their pockets in time for Christmas, amid growing expectations of a string of interest rate cuts.Credit: Eddie Jim

Markets, which have proven more accurate than economists in anticipating the RBA’s changes to rate settings, started the week putting the chance of a quarter percentage point July cut at three-in-four. By the end of the week, expectations were at 97 per cent.

Through the rest of the year, markets and many economists believe the bank will bring the official cash rate down from 3.85 per cent to 3.1 per cent.

The two cuts delivered by the Reserve since February have saved a person with a $600,000 mortgage about $200 a month in repayments.

Three more cuts by December would increase that saving to $500 a month.

By this time next year, markets believe the cash rate will be at 2.85 per cent, its lowest level since November 2022.

If a person decides not to reduce their monthly repayments, the time taken to repay a 30-year loan could fall by up to eight years.

The turnaround in market expectations on future rate cuts was driven in part by the Reserve Bank’s most recent board minutes, which showed that at its May meeting it seriously considered a half percentage point rate reduction, and the soggy national accounts for the March quarter.

The economy expanded by a less-than-expected 0.2 per cent through the first three months.

Household spending, which accounts for half of all economic activity, increased by 0.4 per cent through the quarter. But those figures confirmed the struggle facing many consumers, especially those facing higher mortgage repayments.

Over the past 12 months, consumer spending has increased by just 0.7 per cent.

Spending on clothing and footwear grew the fastest, up by 3.2 per cent, closely followed by insurance and financial services, growing by 3.1 per cent. However, consumers spent twice as much on insurance and financial services, at $26 billion, in the March quarter than on clothing.

Households sliced spending on new cars and driving those vehicles, expenditure on food grew by just 0.4 per cent, while eating out at restaurants or takeaways lifted by a modest 0.3 per cent.

AMP deputy chief economist Diana Mousina said the figures, on top of the general economic outlook, meant the Reserve Bank would have to consider more rate relief.

“This gloomy growth outlook argues for more interest rate relief from the RBA, as the economy is travelling slower than expected. We had been expecting another 0.25 percentage point rate cut at the August, November and February board meetings, but now expect another 0.25 percentage point cut in July,” she said.

One concern about further interest rate cuts is that they may drive up property prices in a country with some of the least affordable housing in the developed world.

But Westpac’s head of Australian macro-forecasting, Matthew Hassan, said existing high prices would prove an ongoing headwind for the market.

He said the February and May rate cuts, on top of expected further rate relief, were providing some impetus to prices.

“However, the reaction remains measured to date, consistent with our view that the nature of the easing and the high starting point for prices would see a fairly muted affordability-constrained response,” he said.

“All up, where a lift is evident, markets appear to be tracking a slow, shallow turn. That may change. We are wary of housing’s famous interest rate sensitivity. There is also evidence of substantial ‘pent-up’ or delayed activity.”

Not everyone is convinced the bank will deliver another cut in July.

ANZ’s head of Australian economics, Adam Boyton, noted that the national accounts showed household finances were now improving rapidly, which meant the RBA could hold fire on further interest rate relief.

“Household incomes are now showing robust growth, with the level of real income having returned to the pre-COVID trend. Given the strength in income growth, we don’t think it will take much more on the interest rate front to make households confident enough to spend more,” he said.

TD Securities, which had expected just a single rate cut this year in August, now thinks the RBA will move again in November.

“We do not see a strong case for the RBA to ease again as early as July, but this is where the risk lies. The RBA could justify a July cut as taking out insurance,” TD’s senior Asia-Pacific rates strategist Prashant Newnaha said.

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