Good news for borrowers: cash rate likely to drop soon after it peaks

While Australia’s biggest Reserve Bank Survey shows no change expected to the cash rate on Tuesday, borrowers can expect rates to rise next year followed by a downward cycle as soon as 2017, according to one of Australia’s biggest comparison websites finder.com.au.

All 33 leading experts and economists in the finder.com.au Reserve Bank Survey – including from the major four banks – are betting the Reserve Bank will keep the cash rate at 2.50 percent on Melbourne Cup day (Tuesday November 4, 214).

The most common reasons for a hold on Tuesday were regarding the economy not strong enough to warrant a rise, high unemployment and the Australian Dollar, global uncertainties particularly in the Middle East and Europe, inflation is on target and pressure on house prices.

For the past 20 years, the Reserve Bank has moved the cash rate nine times on Melbourne Cup day, six of which were in the past decade.

The vast majority of experts (91 percent or 30 out of 33) is expecting the cash rate to start rising next year, with two experts forecasting rates to rise in 2016.

Just one of the 33 experts – Andrew Wilson, Senior Economist at Domain Group – predicts the next cash rate move will be a drop in the first quarter of 2015, citing “…bias now turning to downside … house prices now falling, inflation low, unemployment and dollar still too high, sharemarket weaker and rising concerns over global economic outlook.” (Please see below for full comments by all panelists.)

Out of the 32 who expect the cash rate to rise, they predicted it’s likely to be in August 2015 – the average of these predictions.

Michelle Hutchison, Money Expert at finder.com.au, said interest rates won’t rise for long before dropping again.

“Our economy is under pressure to perform better, and all 33 experts in the finder.com.au Reserve Bank Survey believe that the cash rate won’t rise for very long before it will start to fall again.

“The survey found that the cash rate is likely to peak at 4 percent in 2017 according to the average forecast.

“There were varied expectations of when the peak could occur and how high the cash rate will rise, with majority (60 percent or 18 respondents) expecting the cash rate to hit its peak in 2017, while eight respondents (27 percent) are expecting the peak will be reached in 2016 and four (13 percent) expect the peak to hit in 2018.

“One expert – David de Ferranti, Market Analyst at Forex Capital Markets – is forecasting the highest peak, with the cash rate to hit 5.5 percent. One in three (33 percent) are expecting the cash rate to hit 4.5-5 percent, a further one in three (33 percent) expect the peak to hit 4-4.25 percent while the remaining 30 percent are expecting a peak of between 2.75 percent and 3.75 percent.

“It’s also clear that most experts believe the cash rate won’t hit the high levels we’ve seen in the past. And regardless of when the peak will be reached, it’s likely to start falling soon after.”

Almost half of the respondents (13) are expecting the cash rate to start falling again in 2018, while three experts are forecasting a drop as soon as 2017. Four expect to see it to drop in 2019 and 10 are expecting it to reduce beyond 2019.

“This is great news for borrowers or those planning to enter the property market this mortgage season, as they can prepare for around two years of rising interest rates before they will likely come down again.

“Borrowers need a buffer of at least $300 per month for an average $300,000 loan if the cash rate hits 4 percent.