Last week was a big one for interest rates.
A week after the Reserve Bank of Australia (RBA) held its latest monetary policy meeting and kept the cash rate at 4.45%, its counterparts in the United States met for the final time this year.
This saw the US Federal Reserve elect to cut interest rates by a quarter of a percentage point to the 4.25%-4.5% target range.
While this cut would ordinarily be celebrated, Wall Street and the Australian share market were sold off following the meeting because the central bank indicated that there would be fewer than expected rate cuts in 2025.
This appears to have sparked fears that interest rates may not go as low as hoped in Australia, which would be bad news for borrowers.
But is that the case? Let's see what the market and the economics team at Westpac Banking Corp (ASX: WBC) is saying about interest rates in 2025.
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Where are interest rates going in 2025?
The RBA won't be meeting in January, so the first chance of an interest rate cut will be in early February.
The good news is that the market is convinced that a rate cut will take place at this meeting. Finally some relief on the way for homeowners!
The latest ASX 30 Day Interbank Cash Rate Futures February 2025 contract was trading at 95.725, which indicates that there is a 73% expectation of an interest rate decrease to 4.1% at the next RBA board meeting.
After which, the cash rate futures implied yield curve indicates that the market expects a further 25 basis points cut to 3.85% by June or July 2025. Then a further cut to 3.6% is almost fully priced in by the end of the year.
What is Westpac saying?
According to the latest Westpac Weekly economic report, Australia's oldest bank expects an interest rate cut in May but sees potential for one to happen sooner.
Westpac chief economist, Luci Ellis, said:
The change in language certainly shifted market pricing of future rate moves. And to be fair, the probability of a rate cut earlier than our current base case of May 2025 has lifted, both because of the data flow and the RBA's evident response to it. But a lot can happen between now and May.
For now, Westpac holds firm with its rate cut forecast for May to 4.1%. It then expects the cash rate to reduce to 3.6% by September and then 3.35% by December 2025. After which, the bank believes that rates will stay at this level until at least the end of 2026.
