Reserve Bank of Australia interest rates
Image – Canva.
  • The historic average interest rate was 4.6 per cent
  • A rise to 4.6 per cent could see loans increase another $500 per month on top of other rises
  • That total could be some $3,500 per month more on a home loan since rate rises began

Homeowners could be in for more interest rate pain, with new analysis showing that the official cash rate (OCR) could climb as high as 4.6 per cent.

Analysis from Canstar found that over the past 33 years, the historical average cash rate has been 4.6 per cent, a full 1.5 percentage points higher than the current cash rate of 3.1 per cent.

Canstar’s finance expert, Steve Mickenbecker said despite the sharp increase in interest rates over the past six months, there could be room for rates to move higher than many people expect.

“Today, Australia’s cash rate is 3.10 per cent after a record run-up, yet it’s still well below the historical average of 4.6 per cent,” Mr Mickenbecker said.

“A cash rate as high as 4.6 per cent would put the average variable rate for existing borrowers at 7.48 per cent and make many mortgage holders nervous.

Will inflation be tamed?

Mr Mickenbecker said it’s still too early to tell if the current hikes are going to be able to tame runaway inflation that recently hit 7.8 per cent, or if the Reserve Bank of Australia (RBA) are going to need to settle on a higher neutral rate.

“Even if we exclude the impact of the cash rate sitting above 7.5 per cent in the early 1990s, which could be considered a deviation from the norm, the adjusted average cash rate of 4.1 per cent is still way above the current level,” he said.

“There is debate over what the neutral cash rate setting is and it does change over time.

“Neutral in the 1990s that started with a 17.50 per cent cash rate and neutral in the 2020s, which saw a record low of 0.10 per cent, is not the same number.”

“Nonetheless, an average over a 33-year period gives some indication about what is at least normal, and that is a cash rate of 4.6 per cent.

Cash Rate Target

cash rate target canstar
Source: RBA. Prepared by Canstar on 01/02/2023.

According to Mr Mickenbecker, the RBA will likely settle on a higher cash rate unless the economy begins to rapidly decline

“Before 2009, the cash rate had never been below 4.25 per cent, and it only hit subsequent lows in response to the Global Financial Crisis,” he said.

“It took another crisis, COVID, to knock it down to 2020’s low.

“Concerns about impending recession overseas and contagion to Australia will likely see the Reserve Bank take their foot off the pedal after another two or three cash rate increases.

“But history tells us that any pause might be a breather and not necessarily a signal of imminent lower rates.”

Current forecasts point to more hikes from the RBA, starting with the meeting next week, Mr Mickenbecker said.

“Two of the big banks are already predicting a 3.85 per cent cash rate by May, while Deutsche Bank has predicted four rate rises to reach a cash rate of 4.1 per cent by August,” he said.

Thousands more per month

Mr Mickenbecker said borrowers are already being stretched by the current rates hikes and further increases will see them stretched further.

“By now a borrower with a $500,000 loan has seen their repayment go up on average by $888 since April 2022 to now be paying $2,991 per month,” he said.

“Another 1.5 per cent will add a further $498. It’s time for borrowers to get into as low a priced loan as they can find. Even if times don’t get tougher, they’ll be better off.

“Refinancing from an average variable rate of 5.98 per cent to the lowest rate of 3.99 per cent for a $500,000 loan over 30 years will save $607 per month.

“That’s close to eight 0.25 per cent rate increases, which takes away some of the pain.”

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