Rate Cuts Have started

We’re moving forward at full speed now.

The market has been in a state of uncertainty regarding the direction of interest rates. Many experts anticipated a potential hike at the last meeting.

But that’s behind us.

Rate cuts are now on the horizon.

Leading the charge, CBA decided to take the initiative last Friday by reducing rates for new borrowers:

The Commonwealth Bank has lowered variable interest rates for most new home loan customers, indicating that competition in the mortgage market is heating up once again.

Australia’s largest lender announced on Friday that it has cut the variable mortgage rate for new owner-occupier borrowers by 0.25 percentage points to 6.89% for those with a 20% deposit.

For customers with a larger deposit, rates will drop by 0.20 percentage points. Additionally, variable rates on some investment loans have been reduced by up to 0.35 percentage points.

These cuts follow the term deposit rate reductions reported by The Australian Financial Review on Tuesday and come ahead of anticipated Reserve Bank rate cuts, expected later this year or early next year as inflation returns to target.

While part of this move is about competition in the mortgage market, it also reflects CBA’s confidence that the next rate change will be downward. If they weren’t confident, they wouldn’t risk exposing themselves like this.

I anticipate that other banks will follow suit soon. The signs are clear—the next move by the RBA is likely a rate cut.

Especially with Fed Chair Jerome Powell announcing over the weekend that the U.S. might be ready for cuts sooner rather than later:

Officials from three of the world’s major central banks indicated on Friday that they are set to lower—or continue lowering—interest rates in the coming months, signaling the beginning of the end for an era of high borrowing costs as the global economy emerges from post-COVID inflation.

“The time has come for policy to adjust,” Fed Chair Jerome Powell stated at an annual gathering of global policymakers and economists in Jackson Hole, Wyoming, effectively committing the U.S. central bank to lowering rates when officials meet in September.

… Powell provided limited guidance beyond September, stating, “The direction is clear, but the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.”

But he did mention that he and his colleagues will now take more cues from the labor market than from inflation.

Most central banks are already cutting rates—Canada, New Zealand, the EU, the UK, China.

Once the U.S. makes its move, likely in September, Australia will be one of the few left holding out.

That won’t last for long.

And CBA knows it.