Australian banking system chief intends to offer breathing capacity to households with mortgages

The Reserve Bank of Australia (RBA) is expected to provide "breathing capacity" to households with mortgages by cutting the official cash rate for the first time since the early days of the Covid 19 pandemic.

The market is pricing in a 90% chance of a 25 basis point decrease on Tuesday, according to the ASX's rate indicator, although several economists have warned they expect the decision to be closer than the odds suggest.

Former RBA board member Warwick McKibbin said there would probably be a cut, despite it rubbing against his view of what the central bank should do, reports the Guardian.

"Given the uncertainty in the global economy and the fact that core inflation is outside the target band, I think the RBA should hold," said McKibbin, who is now the director of the Australian National University's centre for applied macroeconomic analysis.

"However, given the direction of change in the recent inflation data, they will probably cut."

A 25 basis point decrease to a mortgage would save a household with a $750,000 loan $115 a month, according to analysis by Canstar.

Moses Samaha, the executive general manager at credit reporting agency Equifax, said the impact of a cut could take up to nine months to lead to changed spending habits, given people are grappling with so many other high living costs.

"A rate cut would just provide some breathing capacity to cover everything else," Samaha said. "In terms of really seeing that step-change, we're saying it's going to be in that six- to nine-month range."

Equifax data shows that historically it takes up to six months for rate cuts to fuel a change in spending behaviour.

The official cash rate has sat at an elevated 4.35% since November 2023 during a period of high inflation and fast-rising living costs. The last rate cut occurred in November 2020 as part of a policy to stimulate the then-pandemic-stricken economy.