The Reserve Bank of Australia has now lifted the cash rate for seven consecutive months, taking it from its historic low of 0.10% in May to 2.85% in November.
That 2.75percentage-point rise is the fastest increase to the cash rate since 1994 when Paul Keating was prime minister and Australia had just been through a painful recession.
Lenders large and small have passed these hikes on in full to their variable-rate customers. As a result, the average owner-occupier with a $500,000 home loan and 25 years remaining has seen their repayments rise by more than $760 since May, according to RateCity.
Homeowners with a $1 million loan have had to come up with $1500 extra, as the table below shows.
If you are struggling to keep up with the rapid rise in your home loan repayments, you might be wondering when interest rates will fall again.
To answer that question, you need to understand why the RBA is raising rates in the first place – which is to combat inflation.
The cash rate is the RBA’s primary anti-inflation tool. That’s because higher interest rates make the cost of borrowing more expensive which, in turn, reduces demand in the economy.
Inflation is sky-high
Annual inflation – officially known as the consumer price index, or CPI – was 7.3% over the September quarter, according to the Australian Bureau of Statistics.
That figure was higher than many commentators expected – and was a long way off the central bank’s target range of between 2-3%.
However, it’s likely things will get worse before they get better, with RBA governor Philip Lowe warning that the central bank expects a further increase in inflation over the months ahead.
“As is the case in most countries, inflation in Australia is too high,” Dr Lowe said in a statement accompanying November’s monetary policy decision.
“A further increase in inflation is expected over the months ahead, with inflation now forecast to peak at around 8% later this year.
“Inflation is then expected to decline next year due to the ongoing resolution of global supply-side problems, recent declines in some commodity prices and slower growth in demand.”
Dr Lowe also signalled that, as a result, more rate rises were all but guaranteed.
“The Board expects to increase interest rates further over the period ahead. It is closely monitoring the global economy, household spending and wage and price-setting behaviour. The size and timing of future interest rate increases will continue to be determined by the incoming data and the Board’s assessment of the outlook for inflation and the labour market.
Rate rises have happened before
As mentioned above, the last time interest rates rose this fast was in 1994. Back then, the Reserve Bank lifted the cash rate from 4.75% to 7.50% in just five months.
Rates stayed at that level for two years until July 1996 when the RBA began cutting rates again – with the cash rate falling from 7.50% back down to 4.75% over the next three years.
As the graph shows, that story isn’t a one-off.
Every time the RBA has raised the cash rate over the past 25 years, it has come down shortly after.
So if you want to know when home loan interest rates will go down again, history suggests you might not have long to wait.
What do the banks think?
Following the stronger-than-expected inflation data, the major banks updated their forecasts as to the cash rate’s future movements:
How to give yourself an unofficial rate cut
No one knows for sure when the cash rate will once again fall. But that doesn’t mean there aren’t things you can do in the meantime to reduce the size of your home loan repayments.
Chief among these is to switch to a better deal (if your circumstances allow).
Lenders typically reserve their best rates for new customers while keeping loyal customers at higher rates. And, as the RBA graph below shows, the difference between these two rates can be huge – with loyal variable-rate customers paying, on average, an extra 0.48 percentage points in interest over August (the most recent month for which there is data).
Want an unofficial rate cut? Shore Financial can help. To discuss your options, call us on 1300 416 700, email us on info@shorefinancial.come.au or fill in this online form.
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