Banks’ background moves reveal when rates will really fall

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Possibly, maybe, perhaps, the Reserve Bank has now inflicted enough interest rate pain to contain inflation.

The big-picture evidence is the inflation data itself – from a high of well above 7 per cent – now stands at a neat 6 per cent. Then last week there were softer-than-expected wages figures – those elusive pay rises – and an uptick in unemployment.

It all boosts the chances the cash rate will stay at 4.1 per cent for a third successive month.

While no more rate rises are expected, the question on everyone’s lips is when rates could start falling again. Credit: Dominic Lorrimer

In fact, money markets now only give it a 50 per cent chance of one more quarter-point hike to 4.35 per cent by the end of the year (and the Australian dollar fell too, as investors decreased bets of more rises).

So, like an apparition in the desert, there is the prospect of sweet interest rate relief. But when?

Three of the big four banks are publicly saying interest rates have peaked, with NAB the exception and only forecasting one more rise.

The good news for variable mortgage holders is that we may be set for rates 1 to 1.5 percentage points lower.

Their heavyweight economists forecast moves down – though not soon – to stand at 2.6 per cent by the end of 2025 (Westpac), 3.1 per cent by the end of 2024 (CBA), 3.1 per cent by early 2025 (NAB) and the first cut in late 2024 (ANZ).

But forget what they are saying – it’s what the big four are in the background, surreptitiously doing that reveals how quickly they think rates will really ease.

Their pricing is the main game, money-on-the-line prediction, and analysis for this masthead by data house Mozo is interesting to say the least.

Two main products require institutions to lock in their interest-rate bets: term deposits that guarantee depositors a rate for a certain time, and fixed-rate mortgages that do the same for borrowers.

On the latter, Mozo head of communication Rachel Wastell put it well: “Despite more than 10 of the smaller lenders increasing fixed rates by an average of 0.40 per cent in the past two weeks, the market leaders are the ones to watch when it comes to forecasting where the cash rate will go.”

And CBA has implemented rate cuts on one and three-year fixed rates, by 15 basis points and 35 basis points respectively.

Meanwhile, large home loan lender Macquarie has roughly cut 25 basis points on its one-to-five-year fixed-rate loans for owner-occupiers.

One-year cuts by both, which means both expect lower rates within that one year.

“Though the cuts may be slight, these could, in fact, indicate that, as Westpac’s Bill Evans recently forecast – we could see the RBA cut the cash rate as early as the September quarter 2024,” Wastell says.

Those slight cuts could well be indicative of the beginning of the downward rate cycle.

There’s one thing you can almost definitely take from them: now is not the time to fix your mortgage rate. You could well be stuck up high as rates come down.

But what about term deposit rates? Their movements are more ambiguous for interest expectations – but they sure are enticing.

What is happening in this market is a pure play for your deposit dollar – several institutions are now aggressively vying for a share of this stable source of funding, and have upped their rates accordingly.

The best bonus-interest savings account, from ME Bank, knocks ING off the paying perch with a rate we haven’t seen for 12 years: 5.65 per cent.

But the key is that is not guaranteed. Each month you don’t meet qualification conditions, this style of contingent annual interest rate comes down.

Meanwhile, you can lock in and earn as much as 5.2 per cent a year for five or four years from Judo Bank, 5.35 per cent for three and two years from Australian Military Bank and 5.25 per cent for one year from both Great Southern Bank and ING.

In any case, the good news for variable mortgage holders is that we may be set for rates 1 to 1.5 percentage points lower. But we might be stuck with the current high rates for possibly a year more.

Nicole Pedersen-McKinnon is the author of How to Get Mortgage-Free Like Me. Follow Nicole on Facebook, Twitter or Instagram.

• 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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