Reserve Bank of Australia May Interest Rate Decision: Expectations and Implications
As Australian homeowners brace for the Reserve Bank of Australia’s (RBA) upcoming meeting on May 19 and 20, caution surrounds expectations for a potential interest rate cut. Currently, the cash rate stands at 4.10 per cent, with many banks and economists predicting a reduction of 25 basis points to 3.85 per cent. While this decrease would provide welcome relief to mortgage holders, Mozo’s personal finance expert Rachel Wastell advises that not all lenders may fully pass on the benefits of this cut.
Wastell emphasised that historical trends suggest subsequent cuts after the first one are often not transmitted in full to consumers. "Past performance isn’t indicative of future performance," she noted, suggesting that the second cut might see lenders holding back on the full reduction. This comes after Australian homeowners experienced their first reduction in mortgage pressures earlier in the year, following 13 consecutive rate rises since 2022.
Following February’s 25 basis point cut, many banks quickly announced they would honour the reduction. However, some lenders, like Virgin Money and BOQ Specialist, opted out, citing their already competitive rates. Wastell predicts a similar trend could occur following the upcoming meeting, advising borrowers to consider options beyond the major banks, especially if they decide not to fully implement the RBA’s changes.
According to data from REA Group, a cut of 25 basis points could translate to monthly savings of $40 to $190 for homeowners, depending on their location. This estimate is based on a median-priced property purchased with a 20 per cent deposit over a 30-year mortgage under average new mortgage interest rates. Wastell has also observed that several smaller lenders have proactively reduced their variable interest rates, with average rates around 6.2 per cent, while many offers sit between 5.7 and 5.74 per cent.
The potential savings from switching lenders are significant. Mozo’s findings suggest that homeowners could save over $300 monthly by moving to a smaller lender offering a better-than-average rate, which could accumulate to nearly $4,000 annually in unnecessary repayments if they remain with a higher-rate lender.
Despite the RBA’s role in setting the official cash rate, the onus is on financial institutions to relay those changes to consumers. Historical data reveal that only four of the ten cuts made by the RBA between 2015 and 2020 were fully passed on by the Commonwealth Bank, NAB, and ANZ, while Westpac accounted for just two. Interestingly, banks have consistently passed on rate hikes in full.
Forecasts regarding future rate cuts have gained traction, with economists noting that recent inflation measures suggest a potential easing trend. The latest data indicates that trimmed inflation has dropped to 2.9 per cent—the lowest since December 2021—reinforcing expectations for further cuts.
The Big Four banks anticipate another rate cut in May, with differing predictions on the total number of cuts for the year:
- CBA: Expects three cuts (May, August, November) bringing the cash rate to 3.35 per cent.
- Westpac: Similar expectations as CBA, forecasting three cuts to achieve 3.35 per cent.
- NAB: Projects five cuts, including a double cut of 50 basis points in May, targeting a final rate of 2.60 per cent.
- ANZ: Also forecasts three cuts (May, July, August) to reach 3.35 per cent.
While initially concerned about potential tariffs from the US impacting the economy, these fears have subsided, allowing for focus on a more modest 25 basis point cut. Nonetheless, CBA warns that the consumer price index data reveals challenges that could complicate the cut’s implementation.
Experts like Yahoo Finance contributor Stephen Koukoulas stress the RBA’s capacity for aggressive rate cuts, advocating for swift action to maintain economic growth and curb rising unemployment. Wastell’s insights represent growing anxiety among borrowers; thus, many homeowners are advised to stay vigilant and consider alternative options to optimise their financial outcomes.
In conclusion, as the RBA’s decision approaches, homeowners ought to remain informed about their options. The evolving landscape following potential cuts could provide significant savings, underscoring the importance of exploring offers beyond the traditional big banks.
