In a significant forecast for Australian mortgage holders, Westpac has announced its expectation that the Reserve Bank of Australia (RBA) will cut interest rates in May 2025. The major bank predicts a reduction of 0.25 percent, which would bring the cash rate down to 3.85 percent. This anticipated change comes despite upcoming inflation data, indicating a shift in the economic landscape.
Westpac’s chief economist, Luci Ellis, emphasized that the recent "turmoil abroad" has altered the dynamics of monetary policy, suggesting that the RBA no longer needs to wait for the Consumer Price Index (CPI) data to make a decision. Ellis stated, "Uncertainty has escalated to a whole new level and the risks have completely flipped." She believes that holding rates steady amid global turmoil and a cooling labor market for the sake of a few percentage points on inflation would be difficult to justify.
In addition to the May cut, Westpac anticipates two more reductions later in the year, in August and November, potentially easing the financial burden on borrowers. A rate cut in May would save the average homeowner approximately $91 on their monthly repayments based on a $600,000 loan over 25 years, according to Canstar. If all three cuts occur, repayments could decrease by a total of $268.
Meanwhile, the Commonwealth Bank has echoed Westpac’s sentiments, labeling a 0.25 percent cut as a "done deal" if trimmed mean inflation aligns with forecasts. Economists at the Commonwealth Bank expect the inflation data, set to be released on April 30, to indicate a 0.6 percent increase in underlying inflation for the first quarter, potentially lowering the annual rate to 2.8 percent, comfortably within the RBA’s target band of 2 to 3 percent.
However, market expectations have shifted recently. Bond traders have diminished the chances of a more substantial double rate cut, now only assigning a one-in-ten probability to a 50 basis point reduction, down from about 40 percent the previous week. Analysts suggest that this change reflects a thawing of tensions between China and the United States, which had previously contributed to economic uncertainty.
As discussions around interest rates continue, the Australian stock market is also reflecting these economic sentiments. There is growing speculation that the RBA will indeed cut rates in May, with the Commonwealth Bank's assertion further fueling this optimism. Yet, the question remains: is this optimism premature? Historical patterns show that similar confidence has sometimes led to disappointment when the RBA has chosen to maintain rates despite global pressures.
Current market movements indicate a potential shift, as capital flows into growth-oriented sectors like Materials, Energy, and Technology, while more defensive sectors such as Consumer Staples lag behind. This week, the best-performing sectors on the ASX include Energy and Financials, both up more than 2%, indicating investor confidence in a favorable economic environment.
In addition, Real Estate Investment Trusts (REITs), which are sensitive to interest rate changes, have not yet shown significant momentum, a departure from the behavior seen in 2019 when they rallied ahead of rate cuts. This lack of movement may suggest broader market hesitance, but could also signal a potential opportunity for investors.
The Financial sector is currently experiencing an uptick, with banks benefiting from increased lending activity that typically precedes rate cuts. This trend mirrors the lead-up to the 2020 rate drop, when Financials surged significantly in anticipation of lower rates. If this momentum continues, it could indicate that the expected rate cut in May is more than just speculation; it might provide the relief that households have been waiting for.
The All-Ordinaries Index has seen a resurgence, climbing over 2% this week, a notable increase not seen since November 2024. This rally has been spurred by a shift in sentiment surrounding U.S. politics, particularly regarding Donald Trump’s recent political maneuvering. His previously hardline stance appears to be softening, with indications that aggressive tariffs on China may become negotiable.
The market has found support at the crucial 7500-point level, which is proving to be a solid floor. Analysts suggest that if the market can break through the 8100 resistance level with conviction, the rally could accelerate, resembling the sharp rebound seen post-COVID rather than a slow climb. However, if momentum stalls before reaching 8400 points, it may indicate that the market is not quite ready for a sustained upward trend.
As the RBA prepares for its May meeting, all eyes will be on the inflation data and market reactions. With the stakes high for mortgage holders and investors alike, the decisions made in the coming weeks could significantly impact the Australian economy.
