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Budget’s hidden interest rate hit for mortgage holders

Mortgage holders will have to wait another year for the much-needed interest rate cut. That’s according to a grim prediction hidden in the federal budget papers.

In addition to expecting the Reserve Bank (RBA) to cut rates later than many economists predict, the government also expects only a 0.75 percent rate cut over the next two years.

“It is assumed that the cash rate will gradually decline from around mid-2025 to reach 3.6 percent by mid-2026,” the budget documents said.

Find out how the 2024 federal budget will impact you by following Yahoo Finance’s reporting here.

Treasurer Jim Chalmers supplies budget and Australian homesTreasurer Jim Chalmers supplies budget and Australian homes

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

The big four Australian banks – Commonwealth Bank, Westpac, NAB and ANZ – all expect the RBA to start cutting rates in November.

Australia’s largest bank, CBA, expects four more 0.25 percent cuts in 2025, which would bring the cash rate to 3.1 percent at the end of 2025.

The Treasury’s later-than-expected rate cut comes after it emerged that inflation is expected to return to the RBA’s target range of 2 to 3 percent by the end of 2024, a full year earlier than the central bank’s own forecast.

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

“That’s why we’ve designed our cost of living policy to alleviate these pressures and shave a further 0.75 percentage points off inflation this year, and half a percentage point next year,” Chalmers said.

The government expects that the $300 discount on energy bills for all households and the increase in rental subsidies will immediately reduce inflation by half a percent in the 2024-2025 financial year and will not increase inflationary pressures.

CBA chief economist Stephen Halmarick said there was a risk the budget would delay rate cuts from November.

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

AMP chief economist Shane Oliver does not think the budget will delay rate cuts. He predicts that the first cuts will take place in November or December of this year.

He believes that budget measures to reduce the cost of living that will directly reduce inflation will be “welcomed” by the RBA, but that the RBA will be “wary of the increase in new stimulus”.

“The net effect adds to the risk of higher rates, but is unlikely to be enough to change our forecast for a rate cut later this year,” Oliver said.

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

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