The escalation of interest rates in recent years has created financial strain for many households, particularly due to a swift increase. Initially anchored by pandemic-related measures, home loan rates have surged from the near 2% mark to surpass 7%. However, with growing speculations among analysts that central banks will soon embark on reducing interest rates to counter inflation both domestically and globally, the focus shifts to the timing of these impending rate cuts.
David Cunningham, CEO of mortgage advisory firm Squirrel, suggests that the anticipated declines could transpire swiftly. Despite the Reserve Bank’s cautious stance in its last official cash rate (OCR) announcement of 2023, indicating potential OCR cuts around 2025, Cunningham points out that the quarterly inflation rate dropped below 1% in December, signaling the end of the “inflation surge.” This development is expected to trigger a substantial reduction in interest rates throughout the year.
Cunningham believes that there could be a notable drop in one-year fixed home loan rates, potentially falling below 6% by the end of the current year and dipping below 5% by the close of 2025. This projection contrasts with the current offerings of around 7.35% for a one-year term from banks. However, he emphasizes that the initiation of the decline depends on a moderation in term deposit rates.
ANZ economists offer a slightly different perspective, forecasting one-year fixed rates to hover around 6.1% by year-end. They anticipate a series of OCR cuts starting in August, aiming for a rate of 3.5% by the middle of the following year. David Croy, a senior strategist at ANZ, acknowledges the fluidity of financial markets, hinting that global interest rate movements could expedite the arrival of the lower rates discussed for later this year or the next.
Despite these optimistic projections, caution is advised. Croy warns against expecting a rapid rate fall and highlights potential risks associated with a sudden and global decline in interest rates. Infometrics chief forecaster Gareth Kiernan adds another layer of caution, stating that assuming victory in the battle against inflation based on December’s data might be premature. He notes the seasonal nature of inflation, highlighting that December tends to be a weaker quarter, and urges careful consideration of potential economic impacts if rates were to fall abruptly.