Why do we keep expecting rate cuts, even when the RBA tells us not to?

When the Reserve Bank of Australia said it would cut interest rates in February, you could almost hear the entire country sigh in relief.

At the time, mortgage holders had endured 13 interest rate hikes since May 2022, and the cash rate had sat at 4.35 per cent since November 2023. Even though the February rate cut was “just” 0.25 per cent, it was welcome.

In February, Reserve Bank governor Michele Bullock called the prospect of consecutive cuts “unrealistic”.Credit: Dominic Lorrimer

To many – economists and financial experts, in particular – it was also a sign of things to come. When another rate cut followed in May, it all but confirmed the belief that a steady trimming of rates lay ahead, and indeed, going into last week’s RBA meeting, the financial market was giving a 96 per cent chance of another cut.

As we all know, that didn’t happen, and many people – especially those who were predicting a cut – were very unhappy. While the disappointment was understandable, I found the shock that poured out after the announcement frankly baffling.

At the February press conference by Governor Michele Bullock after the first interest rate cut in almost two years was announced, someone asked if Australian households could expect consecutive cuts throughout the rest of the year. If you rewind and look at what she said, it’s clear the governor warned us all – pretty strongly – that we shouldn’t get our hopes up.

She called the prospect of consecutive cuts “unrealistic”, and added that “the market is expecting quite a few more interest rate cuts by the middle of next year; about three more on top of this. Whether or not that eventuates is going to depend very much on the data – our feeling at the moment is that that is far too confident”.

When suddenly our rate cut daydream was no longer on the table, people understandably were pretty unhappy.

As if that were not clear enough, Bullock added: “I want to be clear that today’s decision does not imply that further rate cuts along the lines suggested by the market are coming”. She also said: “We have to be careful not to get ahead of ourselves”.

There are some very valid reasons for why experts were caught off guard by last week’s decision (namely, the jobs figures, which many now see as proof the decision by the RBA and Bullock was wrong).

But what interests me is not why a predicted outcome did not eventuate, or who is to blame, but why so many people believed something would happen after being told it was unlikely.

I see this a lot when talking to people about money, and in large part it comes down to the psychology of how we process information that’s tied to something so important to us – in this case, our financial wellbeing and the roofs over our heads.

Perhaps nowhere are our beliefs challenged more in this sense than when we look at the lottery system. Despite having a better chance of being struck by lightning than winning the lottery, Australians spent more than $7 billion wagering that they would win between 2020 and 2021.

According to Professor Leaf Van Boven, a psychology expert at the University of Boulder Colorado who researches why people play the lottery, humans have a natural tendency to overvalue the chance of something happening when the odds are low, and overestimate the odds of coming out on top.

Don’t get me wrong – I’m not comparing interest rates to the lottery system. But the way in which we think about both of these things – whether the odds of winning $20 million tax-free on a Thursday night or seeing 0.25 per cent wiped off your repayments after being told explicitly that it’s unlikely to happen – bears some resemblance.

Van Boven says a strong driver in buying into the belief that something with low odds will have a positive outcome is that it allows us to daydream. “It’s more about the enjoyment that people experience when they imagine things that are going to happen in the future, which is a powerful emotion,” he says.

A number of studies also show that when we’re in this frame of mind, the power of these emotions allows us to imagine feeling much more strongly about things, should they happen, than we do if and when they do eventuate.

That’s perhaps why so many people last week were imagining how much better their lives would be if they could just get that third interest rate cut last week. And while that may be true to an extent, on an average mortgage of $660,000, that cut would work out to about $25 extra in your pocket at the end of each week.

That’s nice to have, but it’s hardly as life changing as winning the money for a house renovation or a major European summer holiday. But because of those powerful emotions, for many people, it felt like it was.

So when that daydream was suddenly no longer on the table, people were pretty unhappy, and unhappy with the people responsible for not issuing that extra money – even when those very same people had specifically asked people not to get their hopes up and warned that what they wanted to happen was, in fact, very unlikely to happen.

Ironically, last week’s jobs figures do paint a promising picture about what will happen at the next RBA meeting on August 12, and the decision the bank may take. What that is, and whether the Reserve chooses to continue holding the cash rate at 3.85 per cent or offers up a cut, is something you couldn’t pay me enough to predict.

Unless its $20 million tax-free, in which case, even I’ll have a punt.

Victoria Devine is an award-winning retired financial adviser, bestselling author and host of Australia’s No.1 finance podcast, She’s on the Money. She is also founder and director of Zella Money.

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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