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When will interest rates stop rising | Citi Australia

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When will interest rates stop rising | Citi Australia

CitiIt’s the million-dollar mortgage question… when will interest rates on home loans finally stop going up?

It seems not a month goes by when the Reserve Bank of Australia (RBA) doesn’t lift interest rates.

For those Australians on a variable home loan rate, the impact has been significant – a jump of nearly 3.5 percentage points since May 2022. That’s an additional $1,000 a month for the average home loan.

It’s understandable, therefore, that many homeowners remain concerned about what will happen in the year ahead. True, any savings accounts will benefit from higher interest rates, but further increases to loan repayments will hardly be welcome.

So how much higher will rates go? And, importantly, what will it take for them to stop?

Better times on the horizon?

In late January, NAB Group Chief Economist Alan Oster forecast two more 25 basis point hikes – one in February and the other in March – before the Reserve Bank puts rates on hold.

As he told his podcast listeners, after that “I think they’re going to sit and watch” – with an eagle eye on how quickly the economy slows.

That said, the RBA Board made it clear in early February that it expects further increases in the months to come. At the very least, this seems to suggest two additional hikes to the rate, resulting in an extra half a percentage point or 3.85 per cent.

The good news is many economists, including Oster, believe a pause is on the horizon, with a return to rate cutting mode slated for late this year or early next. As Oster told his listeners in December, they’re not going to do anything radical in the current circumstances.

Why inflation matters

Any predictions, of course, depend on the elephant in the room: inflation.

If prices and wages keep on rising, and consumer spending continues unchecked, inflation will remain an issue and that, Oster says, means there’s a case for even further interest rate rises.

Why? Because high inflation can hurt us all.

First to feel the effects will be those constrained by stubbornly low wages and tight budgets. As will businesses that rely on discretionary spending. For example, your local restaurant may see a steep drop in customers if more and more people are forced to put their needs before their wants. The cost of its ingredients will also rise – even as it holds off increasing its prices to encourage more customers.

Not everyone will feel the pain equally though. Australians benefitting from higher wages, or who have the flexibility to adjust their spending, might not notice the effects of inflation initially. Similarly, larger businesses offering products and services that people need, and that can readily adjust their prices (think: supermarkets), will also be able to weather the preliminary storm.

Ultimately, though, the longer inflation remains high, the more detrimental it is to our economy – and, therefore, to everybody.

Understanding what’s ahead

Which is why the RBA will continue to increase interest rates if it believes inflation remains out of control. History has shown that if people are encouraged to spend less by putting a higher cost on debt (that is, higher interest rates) prices will begin to fall along with the other markers of inflation.

But that hasn’t happened yet. And, meanwhile, some of the global events that sparked the rise in inflation – COVID-19 and the war in Ukraine – are still to be resolved.

Rethinking your home loan

While these unknowns remain, it’s important to review your home loan, particularly if you’re about to come off a low fixed rate.

You should also consider your personal and financial situation when choosing the right home loan. If you’re juggling several competing financial responsibilities, it might be reassuring to know with certainty what you’ll pay for your home loan over the next three to five years by going down the fixed route.

On the other hand, if you’ve got a bit more wiggle room and don’t want to lock yourself in, you might heed economists’ predictions that rates could soon go on hold and begin to fall late 2023 or early 2024.

By thinking things through, you’ll be better placed to face the future, whatever it holds.

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