Interest rates in Australia: Why they're so high, and are they going down or up in 2024?

It’s the question on the minds of our brightest economic experts. Will interest rates go up, go down or hold steady?

But this is not just intellectual fodder for professional economists. The cash rate is highly relevant to almost every Australian.

For those with money saved in the bank, higher interest rates mean higher returns on money held in a savings account.

For mortgage holders, it means higher monthly loan repayments.

For those considering buying a property, higher interest rates translate to reduced borrowing power.

In some cases, higher interest rates can have an impact on renters if landlords put the rent up in order to cover their increasing loan repayments.

The current official cash rate as determined by the Reserve Bank of Australia (RBA) is 4.35 per cent – its highest point over the past 12 years, but significantly lower than the record high of 17.5 per cent in 1990.

The cash rate has been on hold since November 2023.

The RBA’s board meets eight times a year to determine the cash rate, following the release of key data on inflation and economic activity.

The cash rate is the interest rate charged on overnight loans between commercial banks. Banks and lenders then set their own interest rates, taking into consideration the official cash rate.

Why are interest rates so high?

The RBA has announced 13 interest-rate increases since May 2022.

After a prolonged period when the cash rate was historically low – in early 2021, it dropped to just 0.1 per cent – the RBA started lifting it in response to rising inflation.

The most well-known indicator of inflation is the consumer price index (CPI), which captures price changes for the goods and services that households typically buy. In 2022, the annual CPI peaked at 7.8 per cent, as more and more Australian households felt the financial sting of rising living costs.

The RBA’s goal is to keep this figure between 2 and 3 per cent.

Inflation and interest rates are closely linked, because interest rates are the primary economic lever used by central banks to respond to and manage inflation.

Many central banks across the world have also increased cash rates in recent years in an attempt to manage high inflation.

The RBA’s quick succession of cash-rate rises was criticised at the time, in part because it was at complete odds with then-Reserve bank governor Philip Lowe’s comments in 2021 that interest rates were unlikely to rise until 2024.

He later defended his comments, citing them as “conditional” and not a promise or guarantee.

Will interest rates go down in 2024?

In a statement in June, the RBA board noted inflation was easing but was doing so “more slowly than previously expected”. 

“The board expects that it will be some time yet before inflation is sustainably in the target range,” it said. “While recent data have been mixed, they have reinforced the need to remain vigilant to upside risks to inflation.

“The path of interest rates that will best ensure that inflation returns to target in a reasonable timeframe remains uncertain and the board is not ruling anything in or out.”

The board has given little indication as to when interest rates will be slashed, and could lift the cash rate again if deemed necessary to combat inflation. 

However, the majority of economists expect interest rates to remain on hold until late 2024 or early 2025.

In a poll of 43 economists conducted by Reuters in early June, all but one expected the RBA’s next move to be a cut. Almost 90 per cent of those polled predicted interest rates would remain unchanged next quarter, followed by a 25 basis point cut to 4.1 per cent in the final quarter of this year.

It is important to note economists regularly revise their interest-rate forecasts based on economic data such as the unemployment rate, wages growth and household spending.

What will interest rates be in 2025?

Most economists and analysts predict a rate cut late this year or in early 2025 that would likely take the official cash rate down to 4.1 per cent.

If so, Australia would follow a growing trend of recent cuts by the world’s central banks. Canada and countries in Europe have begun their easing cycle, though their peaks were much higher than Australia’s 4.35 per cent.

However, the RBA board has not ruled out lifting the cash rate again if inflation remains stubbornly high.

RBA governor Michele Bullock told a June media conference that she was not expecting a recession in Australia, despite a slowdown in global growth.

“I would say that that’s not what we’re going to see,” she said. “Interestingly, we think the world economy [has] probably troughed. We think that it won’t actually go down further.”

A panel of 29 economic forecasters assembled by The Conversation said it expected that rate cuts would still occur in 2025, despite higher-than-expected inflation figures for May 2024.

Who has the highest interest rates right now?

The cost of borrowing money generally moves in line with the cash rate set by the RBA. Banks and lenders will consider a range of factors when setting loan rates, but the cash rate is a key factor.

Mortgage holders with a variable rate home loan will likely see an immediate increase in their monthly repayments when the cash rate is lifted. But for those on a fixed-rate home loan, mortgage repayments won’t change until the fixed-rate period expires.

Since mid-2022, the average borrower’s mortgage repayments have increased by 49 per cent, according to RateCity.

The interest rates on principal-and-interest home loans offered by banks and lenders will depend on a number of factors, including the size and length of the loan, the loan-to-value ratio, if the property is owner occupied and whether the loan is variable or fixed-rate.

Interest rates are between 6 per cent and 8 per cent on variable home loans.

Despite the cash rate holding, Mozo finance expert Rachel Wastell said many smaller lenders were cutting their interest rates to stand out from the crowd.

“There are some opportunities for refinances,” she said. “If home owners are scared to go outside those big four [banks], there are some competitive rates available on the digital end.”

Ray White chief economist Nerida Conisbee advised mortgage holders struggling with high interest rates to “keep holding on and just keep waiting” because there was the possibility of a cut late this year or in early 2025.

For those with money held in a savings bank account, higher interest rates translate to better returns on their deposits.

According to Canstar, the best interest rate in early June for a savings account was 5.75 per cent, but that was only an introductory rate for four months to entice new customers. Known as “honeymoon rates”, they generally will only last a few months before reverting to a lower base rate.