Interest rates and the cash rate are confusing at the best of times. With all the rises they have undergone, it’s easy to feel overwhelmed.
In this guide we’ll answer some common questions about the interest rate and cash rate, how they’ve performed in the past, and talk about a few predictions from chief economists.
If you were interested in learning more about the cost of living and financial hardship assistance, you can read our guide on assistance in times of change on our website.
Why are interest rates going up?
Can You Afford another Cash Rate Rise?
The cash rate can increase for several reasons, from addressing domestic economic factors to wider global events. At the moment, the cash rate is increasing in order to keep inflation under control.
Another reason that the cash rate is increasing is to combat low wage growth, so that consumers still retain some purchasing power. While unemployment is still fairly high, some sectors are able to fill in their labour shortages, which is why the cash rate hasn’t dropped.
If you were after a more detailed explanation on what the cash rate is and how it can affect interest rates, you can check out our guide on the cash rate and home ownership on our website.
How have interest rates performed in 2022?
Cash Rate Predictions 2023
The cash rate had been sitting at 0.10% since November 2020, before rising by 25 basis points to 0.35% in May 2022. It then increased by 200 basis points, or 2%, in four months to reach 2.35% in September 2022. Since then, the rate has increased by 125 basis points to reach its current rate of 3.60% (as of April 2023).
This isn’t the first time there have been a series of changes made to the cash rate. For example, it dropped multiple times from early 1990 until mid-1993, and it increased and dropped multiple times from late 2007 until early 2010. However, this is the longest series of continual changes to the cash rate, which has been a cause of concern for many.
There may be some relief in sight, though, as the RBA Governor Phillip Lowe’s recent media release states that inflation appears to have peaked in Australia, and that inflation on goods is predicted to ease within the next few months. He also stated that the RBA is aiming to curb this period of high inflation and high interest rates and expects that inflation will return to its target rate of 2-3% in 2025.
Because of these factors, the RBA chose not to raise the cash rate in April, which the Governor states will allow the Board to better assess the impact of the recent increases.
However, as there is some lag between the RBA’s changes to the cash rate and the ripple effect on the market, it may be some time before we start seeing changes to interest rates.
How high will interest rates go?
Interest rates are difficult to predict, so its hard to know for sure how high rates will go or when they’ll peak. However, some chief economists for the Big Four Banks have made some predictions based on the most recent April announcement from the RBA.
The Big Four all predict that the cash rate will peak at 3.85%, with CBA, Westpac, and NAB predicting this will happen by May, and ANZ predicting this will happen by August.
After peaking, CBA predicts that the rate will drop down to 2.85% by May 2024, while Westpac predicts it will drop to 2.35% by May 2025. NAB is predicting a drop to 3.10% by April 2024, and ANZ is predicting a drop to 3.60% by November 2024.
These are only predictions so they may change over the next few months and there’s no guarantee they’ll come true, but they are in line with what the Governor has stated.
"The central forecast is for inflation to decline this year and next, to be around 3 per cent in mid-2025. Medium-term inflation expectations remain well anchored, and it is important that this remains the case"
RBA Governor Phillip Lowe
When does the RBA announce interest rate increases?
The RBA board meets on the first Tuesday of the month to discuss monetary policy, and this is also when they make decisions on the cash rate. At the time of writing this guide, the most recent announcement happened on the 4th of April, with the next meeting set for the 2nd of May.
Which banks have increased interest rates?
Financial hardship and assistance in times of change
If interest rates continue increasing, we may see more banks increasing their rates across their lending and deposit products, but these rates may decrease once the cash rate begins to fall.
What are negative interest rates and how do they work?
Negative interest rates are very uncommon in Australia, and have only really been applied to financial institutions that lend to customers, like your bank. Normally, interest rates are positive, or more than zero. Negative interest rates, on the other hand, are rates that are less than zero. Put simply, instead of earning interest for depositing money, you would have to pay interest or fees to continue storing your money.
Luckily for savers, negative interest rates aren’t common for regular customers. They are most often used by governments when they issue bonds, or by central banks such as the RBA when they lend to other banks. Negative interest rates are used when the economy is slow, which encourages banks or investors to lend and to encourage spending, rather than having funds just stored away.
Some of the consequences of negative rates are that interest rates on savings and deposit accounts may decrease, or that fees and charges may increase. Most of the time, though, the effects of a negative interest rate won’t be fully passed on to customers, as the costs usually outweigh the benefits.
With inflation on the rise and interest rates continuing to climb, it is unlikely that we’ll have to worry about negative interest rates for a while. However, once inflation is back within its target range the RBA may aim to reduce the cash rate and interest rates to a ‘neutral rate’, neither positive or negative, in order to stabilise the economy.
This article is intended to provide general information of an educational nature only. This information has been prepared without taking into account your objectives, financial situation or needs. Therefore, before acting on this information, you should consider its appropriateness having regard to these matters and the product terms and conditions. Terms, conditions, fees, charges and credit criteria apply. Information in this article is current as at the date of publication.