Yesterday, Westpac Banking Corporation (ASX: WBC) delivered a bold prediction.
The big four bank now expects the Reserve Bank of Australia (RBA) to deliver four rate cuts over the coming year.
In a 12 June note, Westpac Chief Economist Luci Ellis made no changes to her forecast that the RBA will leave rates on hold at its July meeting. Of the big four banks, only National Australia Bank (ASX: NAB) is expecting the RBA to cut rates next month.
Ellis also affirmed her expectation for the RBA to deliver 25 basis point cuts in both August and November.
However, Ellis now expects the RBA to implement two further rate cuts in 2026. Ellis also suggested they "could be earlier (December and February or February and March) if inflation and the labour market turn out weaker late in 2025 than we currently expect."
Commenting on the factors that may influence the RBA's decision, Ellis noted:
The May labour force data out next week is likely to show a labour market that still looks tighter than the RBA's view of full employment. And while the May monthly CPI indicator, to be published on 25 June, is likely to be a low one, the steer from April and May suggests that June quarter CPI is likely to be a bit above what the RBA is forecasting. Given this, the overall data flow will be enough to convince the Board that further reduction in policy restrictiveness is warranted.
Ellis also flagged the RBA's preference to move cautiously and predictably. She suggested this made 'back to back cuts' less likely.
Four 25 basis point reductions would take the cash rate to 2.85%. This level has not been seen since December 2022.
The cash rate peaked at 4.35% before the RBA started cutting rates this year. It currently sits at 3.85%.
What could this mean for mortgagees?
This could bring major relief to homeowners struggling to make mortgage payments.
It would drive the majority of interest charges well under 5%.
According to Canstar, if Westpac's prediction materialises, someone with a mortgage of $600,000 would save up to $4,200 in interest. According to the Australian Bureau of Statistics, the average Australian mortgage for new home loans is currently $642,121.
What could mortgages do with their spare cash?
If interest rates come down, it could be an opportune time to buy shares instead of paying down the mortgage. Over the past 30 years, Australian shares have increased at a compound annual growth rate of 9.1% per year, according to Vanguard. That far exceeds the near 4% interest rate that borrowers would pay if the RBA delivered multiple rate cuts.
To build their wealth, mortgage holders could consider diverting funds to index funds such as the Vanguard Australian Shares Index ETF (ASX: VAS), which tracks the largest 300 listed companies on the ASX. Over the past 5 years, the VAS ETF has been a solid investment, with the ASX ETF climbing 43%.
