Australia's major banks are forecasting the Reserve Bank will lift interest rates for the 10th successive meeting, taking the cash rate to the highest level in over a decade when the board announces their decision at 2:30pm AEDT.
Economists expect the RBA will lift the cash rate target by 25 basis points to 3.6 per cent — the highest level since May 2012 — after governor Philip Lowe flagged further rate rises would be needed after last month's meeting.
Currently, the RBA has set the cash rate at 3.35 per cent, after the board lifted the cash rate by 0.25 of a percentage point in February.
If the cash rate increased to 3.6 per cent, another $77 would be added to monthly repayments on a $500,000 loan, according to RateCity.
Someone with a loan that size is paying an extra $983 a month since the first rate rise in May 2022 — or a 42 per cent increase.
Rising interest rates are already weighing heavily on thousands of Australian families, including Le Tran's.
"It has hit us hard. We are paying an extra $113 a week," Ms Tran said.
"It's quite a lot of money for us on top of our rising normal expenses. If you multiply by 52 weeks, it's a lot of money."
The school teacher lives in Melbourne's outer-western suburbs with her music teacher husband and their teenage daughter.
"We don't spend too much money on things that are not the basic expenses," Ms Tran said.
Her family is watching what they spend on groceries, has cut back on visits to the family doctor and physiotherapy sessions for their daughter.
"We are actually the middle class, and we are being hit very heavily," Ms Tran said.
She said even celebrating recent holidays like Christmas and Lunar New Year was stressful.
"All the important days are supposed to be the day when you celebrate, but it becomes like something that makes you worry, that it's a burden."
Ms Tran is also worried about future rate hikes the RBA has flagged, and what it means for her family.
"If it goes two more [rate rises] our family will really struggle, for sure."
How high could rates go?
Most of Australia's major banks are forecasting a 0.25 of a percentage point rate hike after the RBA's Tuesday afternoon meeting, and most economists are of the belief that rates will continue to rise throughout the year.
ANZ, NAB and Westpac are all now forecasting that interest rates will peak at 4.1 per cent — which could come in the form of three 25-basis-point hikes in the cash rate in March, April and May this year.
The nation's biggest lender, the Commonwealth Bank, is more conservative in its forecasting.
It is expecting the cash rate to peak at 3.85 per cent, saying the RBA is "underestimating the lagged impact that the already delivered interest rate hikes will have on the economy in 2023".
Analysis by RateCity shows how much mortgage repayments will increase by, should the cash rate peak at 4.1 per cent this year:
Increase in monthly repayments |
|||
|---|---|---|---|
Loan size at May 2022 |
Monthly repayments by May 2023 |
Increase next three months |
Total increase |
$500,000 |
$3,469 |
$227 |
$1,135 |
$750,000 |
$5,204 |
$340 |
$1,702 |
$1,000,000 |
$6,939 |
$453 |
$2,269 |
However, AMP Capital's chief economist Shane Oliver believes taking the cash rate to 4.1 per cent or beyond would be a policy mistake and would risk a major recession.
Mr Oliver thinks the cash rate will remain steady at 3.6 per cent, which would mean no further rate increases after Tuesday's decision.
Effects of past rate hikes are yet to be felt
It takes banks on average three months to pass on the RBA's cash rate increases to borrowers' minimum monthly repayments, according to the Commonwealth Bank, even though the extra interest gets generally added to the loan within a few weeks of the RBA's decisions.
That means borrowers on variable interest rate loans are likely only now beginning to feel the pain of cash rate increases imposed by the RBA in November and December — and there are already signs of it in the economy.
Data for the December quarter GDP showed it was softer than expected.
"Indeed, only 185 basis points of the RBA's already delivered 325 basis points of tightening had hit the cash flow of home borrowers on floating rate mortgages in Q4 22," CBA economist Gareth Aird noted.
"In addition, [around] 40 per cent of home borrowers were on fixed-rate mortgages last year, which meant they have so far been insulated from rate hikes."
When could rates come down?
CBA expects inflation to come down sooner, and expects the cash rate to drop by 50 basis points in the final three months of 2023, followed by more rate cuts in the first half of 2024 with a cash rate of 2.85 per cent by June 2024.
Westpac is predicting a total of seven rate cuts in 2024 and 2025. That would bring the cash rate back down to 2.35 per cent by September 2025.
NAB predicts the first rate cut will be in March 2024, and the cash rate to get to 3.1 per cent by June 2024, while ANZ forecasts that the first rate cut will be in November 2024.
However, forecasts can — and do — change, and are wholly dependent on ever-changing economic conditions, including the heightened risk of recession.
The National Australia Bank has put the risk of recession at 45 per cent, with "risks rising", while AMP senior economist Diana Mousina considers the probability of recession in the next two years at "around 40 per cent".
Le Tran, who moved to Australia from Vietnam in 1991 during the recession, is worried the RBA may go too far in their pursuit to curb inflation.
"Lots of families went bankrupt, or divorced, and I hope that the Reserve Bank will look at the past and think about it and make a good decision," Ms Tran said.
"Because when they decide to put the interest rate up, a lot of families struggle."
