One of Australia’s biggest banks says interest rate pain is over – for now

One of the nation’s biggest lenders believes the Reserve Bank has finished inflicting more pain on borrowers, predicting rate cuts are coming to prop up an economy struggling to deal with high inflation, the war against Iran and the fallout from the federal government’s budget tax changes.

Senior economists with NAB on Tuesday said the Reserve was likely to start cutting interest rates in the first half of next year, even though financial markets currently believe there’s more chance the bank will deliver a further quarter percentage point hit to people with a mortgage by Christmas.

National accounts last week revealed economic growth slowing through the first three months, unemployment has pushed up to 4.5 per cent while inflation – though still well above the RBA’s 2-3 per cent target band – was actually lower than feared in April.

House prices, which can influence consumer spending, are also easing. NAB is forecasting prices in Sydney to fall by 6 per cent his year and by 7 per cent in Melbourne.

NAB chief economist Sally Auld and the bank’s head of Australian economics, Gareth Spence, said this afternoon that the headwinds facing the country meant the RBA – which has lifted rates at its past three meetings – would now hold the cash rate steady.

They said rather than lifting rates, the bank was more likely to start cutting rates early in 2027, with the cash rate at 3.6 per cent by year’s end.

A key factor is the strength of the property market, which is likely to be affected by the government’s changes to negative gearing and capital gains tax. A bigger-than-expected slowdown in housing could force the RBA to move even faster.

“The next move in the cash rate is likely to be down, but the timing is uncertain,” they said.

“Should activity data weaken more quickly than anticipated, the RBA will cut earlier than we currently forecast.”

Measures of consumer confidence are suggesting the economy could deteriorate further.

The closely watched Westpac-Melbourne Institute measure of sentiment slipped 2.9 per cent this month to close to its lowest level in its 50-year history.

Pessimists outnumber optimists by almost 20 per cent, with people particularly concerned about their family finances now and over the coming 12 months.

Westpac’s head of macro-forecasting, Matthew Hassan, said inflation remains uppermost in the minds of consumers, with only the war against Iran shading it as an issue.

But the May budget and its various tax measures are also weighing on attitudes towards the economy.

“The survey detail shows cost-of-living issues remain front and centre, the temporary halving in fuel excise tax providing only a small and brief reprieve,” Hassan said.

“Meanwhile, other concerns may be starting to emerge, with a sharp drop in house price expectations suggesting some consumers are becoming more unsettled about the impact of recently announced tax changes.”

While Australians are expecting the values of home to fall, the latest official measure of the property market shows houses and units have never been more valuable.

Data from the Australian Bureau of Statistics released on Tuesday morning showed the value of a record 11.5 million dwellings climbed by $316 billion in the first three months of this year to hit $12.8 trillion.

The nation’s homes have climbed in value by more than $1.3 trillion over the past 12 months.

The average price of a dwelling across the country rose by $22,300 through the March quarter, taking it to $1.1 million.

The most expensive dwellings remain in NSW, where values were up $5000 to $1.32 million. Dwelling values are above $1 million in Queensland, Western Australia and the ACT.

The only state where the average dwelling value eased was Victoria, slipping by $2400 to $947,100.

The value of the nation’s homes last fell over a six-month period in 2022. But since the September quarter of that year, values have jumped by almost a third – or $3 trillion.

The figures predate the federal government’s changes to property taxes and most of the Reserve Bank’s recent increases in official interest rates.

The numbers also revealed 54,200 dwellings were added to the nation’s housing stock in the quarter, the single largest three-month increase since 2016.

AMP economist My Bui said the drop in consumer confidence showed the RBA’s previous rate hikes are slowing down the economy.

“While confidence readings are soft leading indicators, the weak results today still warrant a cautious stance and a pause in rate hikes,” she said.

The Reserve Bank’s monetary policy committee meets next week, with markets expecting it to hold the cash rate at 4.35 per cent.

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