Markets set for 25 bp cash rate cut: RBA's May call a live one
Up until Friday last week, markets had priced in a 100% chance of a 25 basis point cash rate cut on Tuesday - pretty good odds in anyone's book.
But after robust jobs figures came out on Thursday, the odds dropped to a slightly more backable 96%.
Commentators and analysts are all but united on the call, given the quarterly underlying inflation number has fallen back within the RBA's target range and the wage price index was right in line with the central bank's forecasts.
Underscoring the case for a cut was the softer household consumption data for the first quarter of 2025, not to mention the stunted outlook for global economic growth brought on by US trade policy.
But despite all the downers, data last week showed Australia's jobs market continues to boom with another 89,000 people finding work in April.
The share of the working-age population with a job or looking for one has climbed to a near-record high of 67.1%.
The RBA may feel a little uncomfortable that a relatively low unemployment rate (steady at 4.1% in April) may cause unsustainable wage pressures but the market agrees it's certainly not enough to hold off a May rate cut.
Most of the big bank economists are also predicting a follow-up 25 basis point cut in July.
ANZ is the outlier after revising its cash rate outlook on Friday to scrap its July call, saying there will be only two more rate cuts in 2025 - May and August.
The RBA will announce its cash rate decision on Tuesday at 2:30pm.
One of the big four banks is generally the first to pass on the cash rate cut to its home borrowers.
Westpac was the frontrunner for the February 2025 rate cut, the first drop in the cash rate for more than four years.
The others generally follow in quick succession with smaller lenders following suit over the ensuing days.
Last time, almost all lenders passed the cash rate on in full (with the notable exception of Virgin Money) and it remains to be seen whether lenders will do the same in May.
Some lenders will automatically decrease the home loan repayment amount from a linked account while others will wait for the borrower to decrease it themselves.
New data from CommBank shows just 14% of its eligible home loan customers reduced their direct debit repayments following the February rate cut.
The 25-basis point cut delivered monthly savings of up to $80 to borrowers making principal and interest (P&I) repayments on an average loan size of $500,000.
But 86% of eligible customers left their repayment amounts unchanged.
CBA's home buying boss Michael Baumann said the bank will continue to leave the decision in the hands of its customers.
"Home owners appreciate the flexibility to make financial choices that suit their current and future goals and we offer eligible home loan customers the option to reduce their direct debit repayments or leave it untouched," Dr Baumann said.
Choosing to keep the same repayment amount while rates drop can considerably reduce the interest costs on a home loan.
Savings.com.au's Extra and Lump Sum Payment calculator shows paying an extra $80 a month on a $500,000 home loan at an average owner occupier rate of 6.10% p.a. can save more than $44,000 in interest over a 30-year term.
It would also reduce the loan term by one year and 10 months.
"These additional payments will also increase the available balance of their loan accounts and customers may have the flexibility to redraw the available balance at any time, for example if they experience an unexpected cost," Dr Baumann said.
For those planning to buy a home, home lender Tiimely says a potential 25-50 basis point rate cut can lift average borrowing power by around $12,000-$24,000.
Meantime, banks and other authorised deposit-taking institutions (ADIs) are generally slower in passing on cuts to savings account interest rates but they inevitably happen.
On Tuesday - along with the cash rate decision - the RBA will also release an updated Statement of Monetary Policy which may provide a clearer picture of the board's rationale for further rate cuts in 2025.
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Base criteria of: a $400,000 loan amount, variable, fixed, principal and interest (P&I) home loans with an LVR (loan-to-value) ratio of at least 80%. However, the ‘Compare Home Loans’ table allows for calculations to be made on variables as selected and input by the user. Some products will be marked as promoted, featured or sponsored and may appear prominently in the tables regardless of their attributes. All products will list the LVR with the product and rate which are clearly published on the product provider’s website. Monthly repayments, once the base criteria are altered by the user, will be based on the selected products’ advertised rates and determined by the loan amount, repayment type, loan term and LVR as input by the user/you. *The Comparison rate is based on a $150,000 loan over 25 years. Warning: this comparison rate is true only for this example and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate. Rates correct as of . View disclaimer.
Important Information and Comparison Rate Warning
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