Next week will be a nervous one for borrowers with the Reserve Bank of Australia (RBA) meeting to discuss interest rates.
While only a few weeks ago homeowners were hoping the central bank would cut rates next week, there's now a real fear that the RBA could actually take rates higher. This is because inflation is proving hard to tame.
With that in mind, let's now take a look at what the economics team at Westpac Banking Corp (ASX: WBC) is predicting ahead of next Tuesday's meeting.
Will the RBA increase interest rates next week?
The good news for borrowers is that Australia's oldest bank doesn't believe the RBA will increase rates on Tuesday.
Commenting on the prospect of rates rising, Westpac's chief economist, Luci Ellis, wrote in the bank's weekly economic report:
There is a state of the world in which the RBA would need to raise rates. Consider a scenario where services inflation fails to decline further, the federal Budget later this month is more expansionary than expected, and the Fair Work Commission hands down a decision for an increase in the minimum wage not much below last year's outsized result, even though inflation is much lower one year on.
Ellis doesn't believe this is likely to happen. She adds:
None of these outcomes seem likely given the atmospherics, but it is understandable that policymakers might want to see the actual results, and a bit more progress on inflation, before even thinking about cutting rates.
In light of this, the chief economist doesn't think the central bank will increase rates again. She continues to forecast the next move will be lower based on current available economic data and expects the RBA to hold firm next week. Ellis said:
Could they hike? Not yet, and probably not given the current run of data. The language following next week's meeting could be more hawkish. In the end, though, the Board will and should remain forward looking. We continue to expect the next move to be a cut, down the track.
When will rates go lower?
Westpac believes the first rate cut will happen in December. This will take the cash rate down to 4.1%.
After which, the bank is forecasting a series of cuts in the following 12 months, much to the relief of borrowers. Westpac expects rates to fall to:
- 3.85% by March 2025
- 3.6% by June 2025
- 3.35% by September 2025
- 3.1% by December 2025
There may be a few more tough months to come, but interest rate relief is on the horizon according to Westpac.
