Private property issue #118 - Inflation and interest rate drop

New inflation data just came out. Annual inflation is down to 3.3%.

That’s down from 4.0% 3 months ago. And was lower than the 3.6% that the Reserve Bank expected.

This is great news. It points to earlier interest rate drops.

But how fast will interest rates come down?

When will interest rates drop?

Inflation is still too high. It’s just above the Reserve Bank’s target bank of 1-3%. But, it’s finally close to target.

Most economists now expect we’ll return within the target band by September (data released October).

This news has excited interest rate markets.

This is where the swap rates come in. Think of them as what it costs the bank to borrow money and then lend it to you and me.

Over the last week, the 1-year swap rate has dropped to its lowest level since October 2022, over a year and a half ago.

So it’s costing the banks less to lend us money for mortgages. The case for some quick cuts is becoming clearer.

ANZ and Westpac cust their interest rates (again)

Westpac cut its interest rates last week. The 1-year fell from 7.14% down to 6.89%.

This was the 4th cut to its 1-year rate since February. What’s more, they cut their 1-year rate in May, June and July.

So you might ask yourself … “What could come in August?”

Expect the other banks to follow.

ANZ made its move yesterday. They went further than Westpac. Their 1-year rate is now 6.85%.

Even better, many banks still offer discounts in the background.

My brokers at Opes Mortgages have negotiated a 6.72% 1-year rate for some clients this week.

So, the 1-year rate you might get is 0.67% lower than the peak advertised rate from earlier this year.

That saves up to $52 a week on a $500k mortgage.

When will interest rates come down?

ANZ's latest forecasts suggest that the 1-year rate could come down to 6% by March and 5.7% by June next year.

Many economists think the Reserve Bank will cut the OCR in November this year.

Westpac says the OCR might go down to 4.5% by the end of 2025.

Who knows what the Reserve Bank will do?

But we don’t need an OCR cut for mortgage interest rates to start coming down. We’ve seen that over the last few weeks.

Last week, the Reserve Bank didn’t cut the OCR. But they did soften their language.

That caused Westpac to start cutting.

But it is true that the big cuts to mortgage interest rates will come as the case for an OCR cut becomes clearer.

That will happen as more data is released.

Is it the light at the end of the tunnel?

We’re not out of the woods yet. Inflation is still too high. Interest rates are still hurting.

But the last 2 weeks provide hope.

• We’ve seen softer language from the Reserve Bank,
• the bank’s borrowing costs have plunged,
• and the banks have dropped their rates.

We can’t party like it’s early 2021 (or even 2019), where interest rates had a 2 or 3 in front of them.

Those days probably won’t come back anytime soon. Maybe never.

But within a year or two, those excruciatingly high interest rates could be a memory.