Article published 05 May 2022
The Reserve Bank of Australia has raised interest rates for the first time in more than a decade and signalled more hikes are on the way.
While the speed and size of interest rate rises remains to be seen, RBA governor Philip Lowe said it’s “not unreasonable” to expect the cash rate will eventually get back to 2.5%.
“How quickly we get there and if we do get there will be determined by how events unfold,” Mr Lowe said in a press conference following Tuesday’s decision1.
If that were to happen, households with a mortgage could be facing hundreds, if not thousands of dollars’ worth of additional repayments each month, according to analysis conducted with Mortgage Choice’s home loan repayment calculator.
The official cash rate was increased by 25 basis points to 0.35% during the RBA’s highly anticipated May meeting, up from a record low of 0.1%2.
How high will interest rates go?
Predictions on how high the cash rate will rise vary between economists at Australia’s big four banks, with most upgrading their forecasts following the RBA announcement.
The Commonwealth Bank says elevated levels of household debt will keep a lid on interest rates, forecasting a peak of 1.6% by early next year3.
ANZ expects the cash rate will eventually “need to lift to 3-point-something” but not for some time.
Here’s a snapshot of how high economists at the big four banks expect interest rates will eventually reach.
1.6% February 2023
2.25% May 2023
2.6% August 2024
2.25% May 2023, eventually 3%+
Forecasts current at time of publication on 5 May 2022.
The RBA’s own assumed forecasts show a cash rate of 1.5% to 1.75% by the end of 2022 before reaching 2.5% by the end of next year.
“There's just a huge amount of uncertainty so I don't think you want to read too much into that,” Mr Lowe said.
“It’s not an unreasonable set of assumptions to make, but all depends on how things develop.”
The development of inflation will be a key factor, as global events – such as the war in Ukraine – and supply chain disruptions continue to push up the cost of food, fuel and goods.
New economic forecasts by the Reserve Bank now predict headline inflation will reach around 6% annually by the end of the year, significantly higher than its previous forecasts of 3.25%5.
But with household debt levels now much higher, Mr Lowe noted interest rate moves could have a larger impact on spending and economic activity than seen previously, limiting the number of hikes needed to cool inflation.
"It is also relevant that households have much more debt than previously, and many households have never experienced rising interest rates. So that is another aspect that we will be watching carefully," Mr Lowe said.