Australia’s current interest rates have steeply increased throughout 2022, causing major concerns among economists, homeowners, businesses and everyday Australians.
As the Reserve Bank of Australia (RBA) has continuously raised the official cash rate eight times this year to curb inflation and strengthen the economy, we look back to Australia’s cash rate, home loan interest rates, savings accounts and term deposit rates in 2022.
Cash Rate Vs Interest Rate
While often mistaken to be the same, the cash rate and interest rate are two separate but related economic indicators in Australia.
In simpler terms, the cash rate (also known as the “overnight cash rate”) is the interest rate that banks and lenders charge on lending and borrowing money from each other in the money market.
Meanwhile, the interest rate is the rate that banks and lenders charge consumers and businesses when lending money. This rate is determined by the banks and is influenced by several factors, such as the RBA cash rate.
When the RBA lifts the cash rate, borrowing money becomes more expensive for banks, so they may increase their interest rates to maintain their profit margins. In turn, the rate increase is passed on to consumers and businesses when lending money.
In contrast, when the RBA lowers the cash rate, it becomes cheaper for banks to borrow money. This signals them to also decrease their interest rates to remain competitive in the market – meaning borrowers and businesses can enjoy lower rates.
Cash Rate History
Since 1990, the RBA has generally kept the rate at a low level, with occasional increases to keep inflation in the 2-3% target range. In the years following 2011, the Bank maintained a low rate with some increases and decreases based on economic conditions.
For example, during the peak of COVID-19, the RBA decreased the cash rate to a record-low level of 0.10% in November 2020 to stimulate the economy.
However, in May 2022, the Bank increased the cash rate by 25 basis points to 0.35% as the economy has become resilient and inflation has picked up more quickly. In an even bolder move that shocked many Australians, the RBA lifted the cash rate by 50 basis points in four consecutive months.
Current Cash Rate in Australia
At its final meeting before taking a break, the Bank increased the cash rate to 3.10% – the highest rate in over a decade. In his statement following the announcement, RBA governor Philip Lowe stated, “Returning inflation to target requires a more sustainable balance between demand and supply,”
“High inflation damages our economy and makes life more difficult for people. The Board’s priority is to re-establish low inflation and return inflation to the 2–3 per cent range over time.”
With inflation in Australia still distant from the target range, will the rate rise continue in 2023? Lowe hinted that further rate hikes are on the table, “The Board expects to increase interest rates further over the period ahead, but it is not on a pre-set course,”
“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.”
Here’s It’s Simple Finance’s founder and managing director, Joseph Daoud, to help you understand the RBA’s impact on interest rate rises and monetary policy:
Why does the RBA increase the cash rate?
The Bank considers several benchmarks when deciding the cash rate, such as inflation, employment and economic growth. Now, inflation is becoming a major concern as the central forecast for inflation may reach 8% by the end of 2022.
If the economy grows rapidly and inflation becomes too high, the RBA may raise interest rates to slow down the economy and tame inflation. On the other hand, if the economy slows down and there is a risk of deflation, the RBA may lower interest rates or maintain them at a low level to stimulate economic activity and improve inflation.
Current Home Loan Interest Rates
While mortgage rates depend on different factors, the cash rate and interest rate are tied very closely. Since the cash rate is at an all-time high, Australian home loan interest rates are also climbing, especially variable home loans.
During the pandemic, hundreds of thousands took out home loans when the interest rate was in the 2-3% range and with the expectation that rates would stay low until 2024.
Right now, borrowers are struggling while lenders are fighting to remain competitive in the lending market. According to Canstar’s statistics as of 5 December, the average rates for owner-occupier principal and interest loans are 5.45% for variable rate home loans and 5.50% to 6.53% for fixed rate home loans.
However, these rates are subject to change depending on the lender, loan amount, loan term and your financial situation.
|Basic||Standard||Package||Overall||1 Year||2 Year||3 Year||4 Year||5 Year|
The interest rate has a big impact on your monthly repayments. So, knowing the cash rate and shopping around can help you compare different loan packages and find the most competitive rates available to you. To help you estimate your repayments and plan, you can easily use our loan repayment calculator.
Current Savings Account Interest Rates
While borrowers are suffering from high repayments, savers are in a better position. Unlike mortgage rates, the recent changes to the cash rate have a positive effect on savings accounts’ interest rates.
|Macquarie||Savings Account||3.45%||0.80%||4.25%||4 months|
Bank of Melbourne
|Maxi Saver||0.85%||3.15%||4.00%||3 months|
|HSBC||Everyday Savings||2.30%||1.45%||3.75%||3 months|
|BOQ||Simple Saver||2.50%||1.10%||3.60%||4 months|
As the RBA lifts the cash rate, banks may also increase the rates on savings. This means that Australians can earn more interest on their savings this 2022 and 2023.
Based on RateCity.com.au, the current average interest on savings accounts sits above 4%. Since rates are high, and savings accounts use compound interest, saving can be easier this time around. Compound interest helps you earn interest on your initial deposit and the interest you’ve already accumulated.
Following the rate jump in December 2022, Authorised Deposit-taking Institutions (ADIs) have also announced rate hikes on their savings accounts:
If you’re looking for a new savings account, it’s important to compare your options to get the best deal for your goals. Higher interest rates on your savings mean you earn more money over time, so knowing your choices in the market can help you maximise your savings.
Current Term Deposit Interest Rates
Term deposits work similarly to savings accounts but cannot be withdrawn at any time like a savings account. Term deposit accounts offer a fixed interest rate over the term of the loan, making it a safe and secure way to save money.
Currently, term deposit rates are on the rise since interest rates are also increasing. Based on RateCity.com.au’s data, the highest term deposit rates don’t go below 4.20%.
Source: RateCity.com.au. As of 05/12/22, based on a $50,000 balance
This can be an effective way to manage your savings and improve your financial stability despite the high cost of living in Australia. Because the amount you invest in a term deposit is not easily accessible, it can help you avoid impulse buying and build a healthy savings habit.
How high will interest rates go in 2023 Australia?
The cash rate in Australia impacts the economy, businesses and your financial decisions. While the current cash rate favours savers, it puts homeowners in distress.
Inflation in Australia is too high, and the forecasts still point to rate hikes in the coming months. It’s important to carefully consider the implications and stay updated with the interest rates to maximise your savings and keep track of your home loan.
To prepare and control your finance, get in touch with our mortgage brokers to get expert help from the start and beyond. It’s Simple will help you break down your options, enjoy tailored choices from the top 40+ banks and lenders in Australia and help you choose and apply for the right loan solutions that match your goals and needs.
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