Rate relief but timing of next cut still up in the air

While the interest cost on the nation’s home loans will fall by $4 billion a year, borrowers’ hopes that there would be several more reductions were dashed by RBA Governor Michele Bullock.

The interest cost on the nation’s home loans will fall by $4 billion a year, or $1200 on the average mortgage, after the Reserve Bank cut its benchmark cash rate for the first time since 2020 as inflationary pressures ease more quickly than anticipated.

But borrowers’ hopes that there would be several more reductions were dashed by RBA Governor Michele Bullock, who warned that financial market expectations of a further three cuts by the middle of next year were “unrealistic” and it was too early to declare victory against steep price rises.

The decision to lower the cash rate by 0.25 percentage points to 4.1 per cent was warmly welcomed by the federal government, with Anthony Albanese calling into radio stations across the country to talk up the news.

The Prime Minister is considered likely to capitalise on the rate cut’s halo effect by calling an election, with an announcement possible as soon as next week.

Major lenders were quick to say they would pass on the cut in full. Westpac issued a media release within one minute of the RBA’s decision, but was much slower than some rivals to apply the reduction to loans, taking until March 4.

Governor Michele Bullock has warned that financial market expectations of a further three cuts by the middle of next year were “unrealistic” and it was too early to declare victory against steep price rises. Picture: David Gray/AFP

Comparison site Finder’s head of consumer research Graham Cooke described any delay as “corporate greed”.

When the cuts do kick in, the minimum repayment on the average home loan of $641,000 will fall by more than $100 a month.

Figures from CoreLogic and CommBank Bank indicate that across Australia’s $2.2 trillion of variable-rate mortgage debt, the monthly saving is about $334 million, or more than $4bn a year.

Speaking to reporters after the RBA’s decision, Ms Bullock said the board was satisfied inflation was declining “sustainably towards” the central bank’s target band of two to three per cent.

“We’re at a point where underlying inflation is at 3.2 per cent and headline inflation is 2.4 per cent,” she said.

“Inflation has eased over the past three quarters and, in the most recent quarter, a bit more than our forecasts anticipated.

“This has increased our confidence further. It’s clear that higher interest rates have been working as anticipated, restricting economic activity and putting downward pressure on inflation,” Ms Bullock added.

“The board judges it’s time to reduce a little bit of that restrictiveness, but we cannot declare victory on inflation.”

The RBA boss said there was particular concern about the “surprising” strength of the labour market, with unemployment at just four per cent.

“While this is good news for job seekers, the board remains alert to the possibility that it is signalling a bit more strength in the economy, which could delay or store the disinflation process,” Ms Bullock said.

She said that due to this and other reasons, “I want to be very clear that today’s decision does not imply that further rate cuts along the lines suggested by the market are coming.”

Investors have been betting there would be as many as three cuts by mid next year. Ms Bullock said that was “unrealistic.”

Markets also anticipate the next cut would come by July. Asked about that by this masthead, Ms Bullock was not as forthright.

“We’ve just cut for the first time. We want to see more information on … inflation and the labour market before we decide what we do next,” she said.

The excitement within the federal government was palpable.

Federal Treasurer Jim Chalmers said the rate cut was a “very good thing”. Picture: NewsWire / Martin Ollman

Treasurer Jim Chalmers was on the phone to CEOs of the big four banks and, while insisting that he didn’t take “credit” for their decision to pass on the cut in full, he considered it a “very good thing”.

Meanwhile Mr Albanese was ringing into radio stations in Brisbane, Sydney and Perth, keen to ensure listeners were across the rates announcement.

When asked about the impact of the cut on his thinking around election timing, the PM’s answer remained vague.

“The election will be on May 17 or beforehand,” he said.

Coalition treasury spokesman Angus Taylor said the rate cut was “welcome relief” that had been a “long time coming”.

“In the course of the last two and a half years or so since interest rates have been rising, a typical Australian household has paid an extra $50,000 … in interest,” he said.

“It’s a long journey back to the standard of living Australians had when these interest rate increases began.”

Originally published as Rate relief but timing of next cut still up in the air