Major change to interest rates forecast

Westpac today pushed back its forecast for the first cash rate cut of 2025 from February to May, following in the footsteps of NAB last week.

In a sliver of silver lining, the big four bank now expects homeowners to benefit from consecutive cuts in May and July, rather than having them spaced out over a longer period.

“An earlier start in February or March is still possible, but it is no longer more likely than a May start date,” Westpac chief economist Luci Ellis said.

“A later start date is also a risk scenario, if inflation does not decline as the RBA is currently forecasting, let alone our own marginally more dovish expectation.

“That said, the longer the RBA Board waits, the faster they will need to move thereafter, as it would then be more likely that they have hesitated too long.”

Westpac hasn’t changed what it expects interest rates to be at the end of the year, still predicting a cash rate of 3.35 per cent in December 2025 – an entire percentage point below the current rate.

While NAB also expects the RBA to start cutting in May, the other two big four institutions – Commonwealth Bank and ANZ – both have a February cut pencilled in.

Ellis said while recent language from the central bank suggests rates will remain at their current level for six months, there was a chance the RBA could be forced to change their outlook and move earlier.

“Things can pivot quite quickly, and the RBA’s view of the economy looks somewhat more hawkish than we think is warranted,” she said.

“Recall that as late as February 2022, the RBA was not signalling that it expected to increase the cash rate anytime soon… yet it raised rates in May of that year.

“When the facts change – it became apparent that wages growth had actually picked up at last – you have to change your mind.

“Recall also that the Reserve Bank of New Zealand pivoted quickly this year, too.

“Only a couple of months before the first cut in August, it was looking like it was going to stay on hold for all of 2024.”

The Reserve Bank board will release its next decision on December 10, and its following meeting will be held in February.