When might interest rates start falling again?

The Reserve Bank of Australia (RBA) is expecting inflation to rise even higher than previously predicted before the year is out, which could contribute to more cash rate hikes in the coming months. But there may be light at the end of the tunnel, with future rate cuts possible if inflation falls into the target band.

What has happened before? 

In the minutes of the RBA meeting in August 2022, the RBA Board discuss the factors that contributed to their decision to raise the cash rate by 50 basis points for the third time in a row. Combined with an earlier 25-point rate hike, the national cash rate has shot from 0.10 per cent in April 2022 to 1.85 per cent in August 2022.

The RBA noted that most lenders have passed on these higher rates in full to mortgage holders on variable rates, and that fixed rate borrowers (which comprise around 35 per cent of outstanding housing borrowing) would start to feel the effects progressively over the next couple of years.

As for savers, the RBA revealed that average interest rates on deposits (e.g. term deposits, savings accounts) have increased, but by less than the cash rate. Net payments by households into offset and redraw accounts were found to have eased in the June quarter, relative to the levels seen in prior quarters, but remained well above pre-pandemic levels.

The RBA acknowledged that higher inflation and interest rates were putting pressure on Australian household budgets, affecting consumer confidence and house prices. And while many households were found to have built up large financial buffers, and to be still saving more money than pre-pandemic, some households with low savings buffers and high debt “will face financial pressures in the period ahead”.

What may happen next? 

The RBA still expects inflation to peak late in 2022. However, their updated forecasts could see inflation reach a higher peak than previously predicted, potentially reaching 7.75 per cent.

Following this peak, inflation is expected to decline over 2023 and 2024, until it reaches the higher end of the 2 to 3 per cent target band towards the end of 2024.

“Members noted that the forecasts were conditioned on a path for the cash rate derived from surveys of professional economists and financial market pricing, with thecash rate assumed to increase to around 3 per cent by the end of 2022, and then decline a little by the end of 2024.”

While this may mean that Australians could expect to see interest rate cuts on their home loans by the end of 2024, the RBA also noted uncertainties around these forecasts, which would require higher interest rates to moderate demand pressure, gradually increasing the unemployment rate, while growth in labour costs remain consistent with inflation returning to target.

Despite these forecasts, the RBA has made it clear that “it is not a pre-set path” and that it would do “what is necessary” to return Australian inflation to the target range of between 2 and 3 per cent over time.

What can you do in the meantime? 

With rates likely to rise and the cost of living putting pressure on many households, there are a few options that Australians could consider to help them stay on top of their finances, such as:

• Keeping track of the latest cash rate updates on RateCity
• Giving yourself a rate cut on your variable rate home loan by refinancing
• Keeping your offset account and/or redraw facility topped up
• Switching to a high interest savings account or term deposit

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