‘Unseen in more than a generation’: Alarming interest rate prediction emerges

Donald Trump has seriously shaken the global economy – and Aussies could soon be in the firing line for a surprising reason.

ANALYSIS

As Anthony Albanese and Peter Dutton face off over who should lead the nation, the issue of interest rates – a major political battleground in past elections – has gone noticeably quiet.

Part of that is arguably driven by the high degree of global economic uncertainty, as the tectonic plates underpinning historic trade relationships and alliances shift and the consequences of it all gradually emerges.

While so far, Australia has proved to be relatively insulated from the escalating trade wars occurring far beyond our shores, to what degree that will remain the case into the future remains to be seen.

This uncertainty extends to the realm of interest rates, as global financial markets and world leaders come to grips with the seismic shift driven by President Donald Trump’s wide reaching “Liberation Day” tariffs.

President Donald Trump’s wide brutal ‘Liberation Day’ tariffs have shaken the world. Picture: Pool via AP

And it could impact the Reserve Bank of Australia’s future decisions. Picture: NewsWire/Nikki Short

The market

As of the latest market pricing, the expected terminal cash rate for the current cycle is 3.08 per cent in December.

This represents a 1.27 percentage point reduction in the cash rate from its cycle peak of 4.35 per cent, where it sat between November 2023 and February 2025.

For the average owner-occupier variable rate mortgage holder, this represents a reduction in interest repayments of approximately 20.3 per cent.

For a household with a $500,000 mortgage, it would represent a total reduction in monthly repayments of $400. For a household with the average new mortgage size of $666,000, it would represent a reduction of $533.

Changes are coming for mortgage holders. Picture: NewsWire/Monique Harmer

Forecast evolution

With the release of last week’s federal budget, we now have an updated view on how the federal Treasury sees inflation unfolding until the middle of 2029.

Headline inflation is now tipped to close out the financial year at 2.5 per cent, before rising to 3.0 per cent at the conclusion of the 2025-26 financial year.

It’s forecast to stay at 2.5 per cent all the way out to the end of Treasury’s forecasts, which cover up to June 2029.

It’s interesting to note that across the entire range of the forward estimates, it’s not tipped to sustainably drop below the middle of the Reserve Bank of Australia’s 2 to 3 per cent target band.

We now have an updated view on how the federal Treasury sees inflation unfolding until the middle of 2029. Picture: iStock

Economists viewpoint

When it comes to the big four banks, some have quite a different viewpoint on where rates are going in the short term and where the cash rate will ultimately bottom out.

Their expectations for the next rate cut and for the cash rate out to the end of the year are as follows.

ANZ: Cuts in May, June and August, taking the cash rate to 3.35 per cent by year end.

Commonwealth Bank: Next cut in May, two further cuts taking the cash rate to 3.35 per cent by year end.

NAB: Next cut in May, two further cuts taking the cash rate to 3.35 per cent by year end.

Westpac: Next cut in May, two further cuts taking the cash rate to 3.35 per cent by year end.

The big four banks have different ideas on where interest rates will go this year. Picture: NCA NewsWire

The outlook

In recent years, the road ahead for interest rates has been a foggy and uncertain one, where surprises to the consensus extended the cash rate’s time at the cycle peak to a near record high.

Today, consensus on the future is something that is harder to come by, unless it’s accompanied by something of a qualifier akin to if external factors remain broadly the same.

But as what is arguably the swiftest and most powerful change to the landscape of global trade in decades unfolds, all else may not remain equal.

The road ahead for interest rates has been a foggy and uncertain one. Picture: NCA NewsWire/Joel Carrett

Things will likely change dramatically, but in exactly what direction and to what extent is up in the air, to a degree unseen in more than a generation.

More and more analysts and economists are tipping that the US economy could fall into a recession – and that will echo throughout the global economy.

On the other hand, there is a school of thought in which President Trump’s tariffs lead to tax cuts in the United States, and these two factors combine to drive a renewed round of inflation, as put forward by Vandana Hari, the founder and CEO of Vanda Insights.

I see a new narrative around Trump's tariffs storm now -- to raise revenues to offset planned tax cuts.
Hmmm..
So, we may be looking at a double-whammy of inflation in the US.... From tariffs AND tax cuts.

— Vandana Hari (@VandanaHari_SG) March 26, 2025

Meanwhile, the Australian economy also faces a high degree of uncertainty even in a vacuum. The federal budget projects that employment growth is going to slow dramatically, from 2.75 per cent in the current financial year to just 1 per cent in 2025-26.

Anthony Albanese and Peter Dutton continue to face off over who should lead the nation. Picture: Thomas Lisson/NewsWire

Could we see a change in government next month? Picture: Jason Edwards/NewsWire

If the government is once again less successful than Treasury forecasts at reducing levels of migration, this could lead to an unexpected rise in unemployment as labour force growth outstrips jobs growth.

How all the various domestic and international economic factors – as well as a potential change in government in Canberra – end up balancing out is truly anyone’s guess at this point. Ultimately, the much hoped for rate cuts may come to pass.

But what costs will be borne by the domestic and global economy in order to facilitate those cuts remains to be seen.

Tarric Brooker is a freelance journalist and social commentator | @AvidCommentator

Originally published as ‘Unseen in more than a generation’: Alarming interest rate prediction emerges