RBA Interest Rates History and Forecast 2023
Interest rates are on the rise globally as central banks tackle mounting inflationary pressures. Here in Australia, the Reserve Bank (RBA) has raised the cash rate eight times since May 2022, bringing the current cash rate to 4.1%. This is the highest it has been since 2010.
What’s driving this shift in RBA policy? How high could rates go? And what does it mean for Australian mortgage holders and home buyers? As the leading Australian mortgage broker for expats and overseas residents, we’re taking an insider look at what’s shaping our interest rate outlook.
The Role of the RBA
The RBA is Australia's central bank, responsible for managing monetary policy, overseeing the payments system, issuing Australian banknotes and more. One of its key objectives is keeping Australian inflation within a 2-3% target band over time.
The main lever it uses is the official Australian cash rate - the interest rate local banks pay to borrow funds from the RBA overnight. This cash rate flows through to affect all borrowing costs in the Australian economy.
When Australian inflation is high, the RBA will raise the cash rate to discourage spending and borrowing locally, slowing the Australian economy and price growth. The cash rate is currently 4.1% in Australia, but further rises are expected in 2023-2024.
What’s Driving the Rate Hike Cycle?
The cash rate was cut to a record low 0.10% in 2020 during the COVID-19 recession. But as the economy has recovered, a perfect storm of factors has seen inflation accelerate rapidly above the RBA’s target. This has forced the RBA’s hand to play catch-up via a series of outsized rate rises in the Australian market.
Key inflation drivers have included:
Where Could Mortgage Rates Go From Here?
Variable mortgage rates in Australia have already increased from around 2.5% to over 5.5% due to the RBA’s cash rate hikes so far. Economists' predictions for how the RBA cash rate will progress in 2024 vary, but most expect it to peak in the second half of 2024 before declining.
According to a survey of 27 economists by the Australian Financial Review, the cash rate is forecast to hit a peak of 4.6% in August 2024. It is then predicted to be cut to 4.35% in November 2024 by those economists.
However, the median economist forecast does not expect the RBA to start cutting interest rates until May 2024. If these economist forecasts are accurate, it could see average variable mortgage rates in Australia potentially climb to over 6.5-7% by mid-2024, before moderating later in the year as the cash rate declines from its peak.
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What Does It Mean for Fixed Rate Mortgages?
Fixed rate mortgages don’t fluctuate with the cash rate in the short term, but lenders will eventually pass on the higher funding costs from rate hikes.
While the current rate hike cycle appears largely priced into fixed rates already, they still have potential to edge higher over the next 1-2 years as economists forecast the RBA cash rate could peak at 4.6% by mid-2024.
Lenders may continue re-pricing fixed rate mortgages gradually over 2023 and 2024 to account for their underlying funding costs rising as the RBA cash rate climbs towards its predicted peak.
What It Means for Mortgage Holders
Higher mortgage rates deliver a hit to affordability through increased repayments. On a $500K loan, the rate rise so far means repayments are around $550 more per month compared to the start of 2022. With variable rates now over 6%, a rise to 7% on a $500K loan would mean repayments could increase by approximately $950 per month compared to 2.5% lows.
For new borrowers, higher rates also limit purchasing power. At 5.5% compared to 7%, buyers lose over $90K of borrowing capacity on a $500K income. Tighter lending criteria further compounds affordability issues.
While negative for households, rising rates are aimed at reining in inflation for more stable growth. But anyone with a mortgage should budget for higher costs. Seek advice on managing increased repayments or even fixing part of your loan. And first home buyers may need to temper expectations on budgets.
Find Support Amid Rising Rates
If any Australian borrowers are feeling concerned about managing the impacts of rising interest rates, know that support is available. As experienced brokers, our team at Odin Mortgage stays across RBA cash rate movements and how lenders respond.
We're always happy to have a chat and provide guidance tailored to your situation. Please feel free to reach out to one of our specialist mortgage brokers today.
It is important to note that these are just predictions, and the actual path of the RBA cash rate will depend on a number of factors, including the level of inflation and the strength of the economy.
It’s a complex time for RBA policy and interest rates. Stay tuned for more insights as we chart these evolving conditions!