But there are still some facts and figures that show what interest rates can do – although there’s no guarantee that every prediction will be correct.
Will interest rates ever go down and when will it happen?
Yes, interest rates will be lowered from their current 4.25 percent sometime in the future. We just don’t know when.
It all depends on when inflation starts to move back towards the target range of 2-3 percent. While it’s down a lot from its peak of 7.8 percent in December 2022, recent data has shown it’s easing — even rising slightly — to between 3.5 and 4 percent.
The major banks are predicting the first rate cut to take place between November this year and next May.
How high can interest rates go in 2025?
Again, we don’t know for sure, but the consensus view is that interest rates are unlikely to rise again — the big four banks and most economists think 4.35 percent will be as high as they’ll go, and a cut it will be the RBA’s next move.
This is what the central bank itself said in its most recent monetary policy statement in May:
The forecasts assume that the cash rate is higher for a longer time.
Staff forecasts are conditioned on the assumption that the cash rate target will remain around the current level until mid-2025 before gradually declining over the remainder of the forecast period.
This path is about half a percentage point higher from 2025 onwards than in the February statement.
Basically, it’s the same assumption the Treasury made in the federal budget – rates hold steady until the middle of next year, then a slow decline.
Everything can change – the Australian Bureau of Statistics will release crucial June quarter inflation figures on Wednesday.
Monthly data has shown that the CPI has increased recently. If quarterly statistics reaffirm this trend, we could see a 14th increase since May 2022.
What will interest rates be in five years?
This is a common question, but it’s one that no one knows the answer to – we don’t know what the rates will be in five months, let alone five years.
Most long-range cash rate forecasts look only at the next two years. The RBA’s forecast period in its latest monetary policy statement extended to mid-2026, when it assumed interest rates would have fallen to 3.8 percent.
What affects interest rates?
The simple answer is inflation.
The Reserve Bank is tasked with keeping inflation (or the consumer price index, CPI) between 2-3 percent.
The tool to achieve this is interest rates – raise the money rate to reduce demand and theoretically curb price rises, or lower it when inflation is too low to give households more spending power and increase inflation.
The more detailed answer is much more complex.
Beyond the CPI, there is a large list of economic factors that ultimately play a role in the RBA’s interest rate decision, including the unemployment rate, consumer spending, international financial conditions, household debt and many more .
Another key measure to keep an eye on is the “trimmed average” – a calculation that excludes more volatile price changes that is the RBA’s preferred measure of core inflation.
If the trimmed mean starts to move down toward the inflation target range, that bodes well for a rate cut. If it remains high or increases, it points towards holding rates steady or even increasing.
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