What can we expect from interest rates in 2024?

Today the Reserve Bank of Australia has hiked the cash rate by 25 basis points to 4.35% - potentially the last hike of the year. Homeowners are likely wondering what they can expect from interest rates next year and if more hikes are in store.

Only a few weeks ago, three of the Big Four Banks were forecasting that the cash rate had already peaked at 4.10%, and that cash rate cuts were coming soon. However, following the latest higher-than-expected inflation figures and unemployment rates in October, they changed their tune. 

With only one more RBA meeting on monetary policy left for the year, let’s explore what Australians can expect from interest rates in 2024, based on the latest predictions. 

2024 interest rate predictions: What the experts are saying

Big Four Banks: rates on hold, cuts late 2024

At the time of publishing, the current interest rate forecast for 2024 from the Big Four Banks is that interest rates will remain stable for the majority of the year, before potential rate cuts begin between August - December.

What will interest rates do in 2024-2025? Big Four Bank predictions

• CommBank: Next cut September 2024, cash rate falling to 2.85% by May 2025
• Westpac: Next cut in September 2024, cash rate falling to 2.85% by December 2025
• NAB: Next cut by August 2024, cash rate falling to 3.10% by March 2025
• ANZ: Next cut by December 2024, cash rate falling to 3.60% by June 2025

All of the four big banks have tipped that today’s meeting on monetary policy would result in a hike to the cash rate. This is currently expected to be the peak rate in this cycle of tightening.

That being said, talk of one more cash rate hike has been building. While ANZ forecast the RBA will only hike once more in this cycle of tightening (today) in response to the latest CPI figures, ANZ economists stated that the RBA “will retain a tightening bias and the risk of additional hikes is real.” 

Additionally, at an FX Market Update webinar, NAB senior FX strategist, Rodrigo Catril, said: "We need to be mindful that typically the RBA doesn't do just one hike. And if you think you're moving away from your inflation goal, a lift of 25 basis points may actually not be enough to get you back to where you want to be."

The RBA: rates will rise until inflation reaches target range

The RBA has been increasing the cash rate since May 2022 for a multitude of reasons, with higher-than-desired inflation levels being a major culprit. 

The RBA has stated for well over a year now that it will continue to stay within this cycle of tightening until headline inflation falls back within its 2-3% target range. Most experts and analysts believe that inflation peaked around the end of 2022, with CPI data - while still high - showing inflation is on a slow decline. 

The latest estimates from the RBA see its central forecast for CPI inflation to decline to around 3%, and reach the target range to stop rate hikes, by mid-2025. 

The Economist: rates high for next decade

A recent article from The Economist painted a picture of a new era for interest rates, indicating that analysts are concerned that rates may remain high for the next decade. 

The days of ‘cheap debt’ may be long gone. After years of near-zero and sub-zero interest rates, many central banks across the world have been hiking their benchmark interest rates in response to high inflation levels, amongst other factors.

The article argues that interest rates may remain high for some time due to a few key factors:

• The “anticipation of faster economic growth”, potentially influenced by advances in technologies like Artificial Intelligence. As growth and interest traits are typically linked, when people’s incomes rise over time, they have less need to save. “Companies, expecting higher sales, become keener to invest. Central banks have to keep rates higher to stop economies from overheating.”
• High-breaking levels of government debt. Government debt may be so significant, it has “sopped up” the world’s surplus savings. A general rule of thumb is that a 10 percentage point increase in debt-to-GDP increases interest rates by 0.35% in the long run, while “every percentage point increase in deficits raises rates by a similar amount”. Put simply, excessive government spending can contribute to a high interest rate environment. 

However, some of the factors driving higher interest rates may also help to reduce rates. One potentiality is that high inflation may eventually lower the real value of government debt. In this instance, while nominal interest rates may be high, real interest rates may not rise as much. Another possibility is that high interest rates push the world economy into a recession. A recession typically drives central banks to cut benchmark interest rates.

So, while the RBA’s cash rate may not start with a ‘1’ for some time, this era of higher interest rates too shall pass (we hope). 

How high could your mortgage repayments rise?

RateCity has crunched the numbers on how interest rate hikes could impact repayments on a 25-year, $500,000 home loan. 

Your monthly repayments may be $1,315 more expensive in 2024 compared to April 2022. This is based on the assumption that your lender passes on every single cash rate hike in full to your home loan as per the Big Four Bank predictions, one more rate hike does occur in December, and that you are currently repaying a variable rate loan. 

What your mortgage could cost you in 2024

Source: RBA average owner-occupier variable rate for existing customers, April 2022. RateCity.com.au. Note: Based on a 25-year, $500k home loan, comparing repayments with RBA average rate in April of 2.86% versus a 7.36% interest rate from a potential cash rate peak of 4.60% in 2024. Does not factor in fees.

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