Budget’s hidden interest rate blow for mortgage holders

Mortgage holders will need to wait another year for much-needed interest rate relief. That’s according to a grim prediction hidden within the Federal Budget papers.

Along with expecting the Reserve Bank (RBA) to cut rates later than many economists are forecasting, the government is also expecting only 0.75 per cent worth of cuts over the next two years.

"The cash rate is assumed to gradually ease from around the middle of 2025 to reach 3.6 per cent by the middle of 2026," the budget papers state.

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Mortgage holders may have another year for interest rate cuts and they could be smaller than expected. (Source: AAP/Getty)

Australia’s Big Four banks - Commonwealth Bank, Westpac, NAB and ANZ - all expect the RBA will start cutting interest rates in November.

Australia’s biggest bank, CBA, expects there will be a further four 0.25 per cent cuts in 2025, which would take the cash rate to 3.1 per cent by the end of 2025.

The Treasury’s later-than-expected rate cut forecast comes after it was revealed inflation is expected to return to the RBA’s target band of 2 to 3 per cent by the end of 2024, a full year ahead of the central bank’s own prediction.

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While inflation has dropped from its 2022 peak, Treasurer Jim Chalmers said the government knew people were “still under the pump”.

“That’s why we designed our cost of living policies to ease these pressures and take another 0.75 of a percentage point off inflation this year, and half a percentage point next year,” Chalmers said.

The government expects its $300 energy bill rebate for all households and rent assistance boost will directly reduce inflation by half a per cent in the 2024-25 financial year and won’t add to inflationary pressures.

Could budget measures delay rate cuts?

CBA chief economist Stephen Halmarick said there was a risk the budget could delay interest rate cuts from starting in November.

“The risk is now more real that the first interest rate cut could be delayed and that the neutral cash rate is higher than we currently estimate due to the expansionary fiscal setting and the high level of investment in the economy,” Halmarick said.

AMP chief economist Shane Oliver doesn’t think the budget will delay rate cuts. He is forecasting the first cut to come in November or December this year.

He believes the cost-of-living budget measures that will directly lower inflation will be “welcomed” by the RBA but it will be “wary of the rise in new stimulus”.

“The net effect adds to the risk of higher for longer interest rates, but is probably not enough to change our forecast for a rate cut later this year,” Oliver said.

Westpac economists also said the budget “should not materially shift the timing of RBA decisions on rate cuts”.

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