What is a rate rise and how often does it happen?

Interest rates are one of the most significant factors influencing the rate of return you may earn on products like savings accounts, or how much you have to repay a bank for a loan.

Over a 25–30-year mortgage it is safe to expect your rate to fluctuate. So, what causes interest rates to rise, and how often can this occur?

What is a rate rise?

A rate rise, or interest rate rise, is when a financial institution increases their interest rates on their financial products such as home loans, savings accounts and credit cards.

Higher interest rates typically mean good news for savers who are hoping to gain a greater return on their nest eggs deposited in savings accounts or term deposits. These accounts offer compound interest on your savings just for keeping your cash with the provider. This is considered one of the lowest-risk investment options to earn a return on your savings.

Higher interest rates also mean bad news for those repaying credit products, like home loans or personal loans. The higher the interest rate on your debt, the greater your repayments will be.

If you are on a fixed rate loan or term deposit, your interest rate will not change during this fixed period. Once this ends, you may find that your loan or deposit reverts to a new, higher interest rate. Keep an eye out for when your fixed period ends to ensure your new rate is still competitive.

What causes interest rates to rise in Australia?

A rate rise typically occurs after the Reserve Bank of Australia (RBA) lifts the official cash rate, which is the benchmark used by lenders to determine the rate when borrowing between financial institutions.

The RBA meets on the first Tuesday of each month (excluding January) and publishes their decision at approximately 2.30pm that day. Banks and lenders look to the cash rate as an influencing factor for how they may set their interest rates. The average cash rate rise is 25 basis points (0.25%) however, the RBA has been known to raise the cash rate by 50 basis points (0.50%).

Keep in mind that lenders don’t always pass on these rate hikes in full to customers, whether to protect home loan customers from higher repayments or to limit the interest savers can earn.

They may also frequently hike interest rates out-of-cycle with the RBA, meaning there is no way of knowing exactly when or by how much your interest rate may rise. In fact, in the months leading up to the May 2022 cash rate hike, home loan lenders were lifting rates on their fixed rate home loans.

At the end of May 2022, the big four banks’ average lowest 3-year fixed rate had climbed by 2.55 percentage points in 12 months, despite no increase to the cash rate prior to this time.

Is it bad when interest rates rise?

A rate rise is not necessarily a bad thing. In 2022, the RBA began hiking the cash rate after over a decade of rate cuts due to high annual inflation. The RBA looks at macroeconomic factors like inflation, wage growth and unemployment when deciding whether to change the cash rate.

This is because increasing interest rates is one way that central banks can work to slow inflation. The theory is that by making the cost of debt for customers and banks more expensive, plus by making savings accounts more enticing with higher rates, Australians may be more likely to keep their money in their accounts. By slowing down spending you should be able to slow down economic growth, which may help with higher cost-of-living pressures in a time of higher inflation.

When interest rates increase, the value of the real estate market generally drops or steadies. And in a time of high residential property values forcing many young Australians and first home buyers out of the market, interest rate rises slowing down house price growth may be welcome news to would-be buyers.

And, as mentioned above, interest rate hikes are good news for savers. If your provider chooses to pass on a rate hike, you should see your savings account and/or term deposit earning you a higher rate of return on your balance.

Compare home loans in Australia