Expectation of Rapid Decline in Interest Rates Amid Predicted Central Bank Cuts

Date Published: 6 February 2024

Key Facts

• Home loan rates have risen from lows near 2% to north of 7% but they are predicted to start falling again.
• The fall in interest rates could happen quite swiftly, as the inflation rate dropped below 1% in December, indicating the inflation surge is over.
• One-year fixed home loan rates could drop below 6% by the end of this year and below 5% by 2025.
• The decline will depend on an easing in term deposit rates.
• ANZ economists forecast one-year fixed rates at around 6.1% by the end of the year, expecting a series of official cash rate (OCR) cuts starting from this August.
• The OCR is anticipated to reach 4% by the end of next year.

Article Summary

After a period of rapid rise, interest rates are now predicted to begin a downturn. David Cunningham, CEO at mortgage advisory firm Squirrel, expects this descent to take place quite swiftly given that the quarterly inflation rate sank below 1% in December, signalling an end to the inflation surge. This situation should trigger a significant drop in interest rates throughout the year.

Cunningham anticipates the one-year fixed home loan rates to fall below 6% by the end of 2023 and below 5% at the close of 2025. It is to be noted that the current rates offered by banks on a one-year term lie around 7.35%. The commencement of the decline, however, relies on a reduction in term deposit rates.

ANZ economists are aligning with these predictions, estimating one-year fixed rates to sit around 6.1% at the end of the year. Additionally, they anticipate a series of OCR cuts starting this August. Their projection is for the OCR to reach 3.5% by mid-next year. Gareth Kiernan, chief forecaster at Infometrics, also expects the OCR to hit around 4% by the end of next year.

However, Kiernan urges caution, warning against assuming that the inflation battle is largely won based on December’s data. He explains that inflation has a seasonal pattern and that the quarterly change was 0.7%, equating to 2.9% over an entire year. This doesn’t put it at the Reserve Bank’s target centre, but just inside the ceiling.

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