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Projected Australia interest rate in 5 years: RBA determined to dampen persistent inflation

By Fitri Wulandari

Edited by Jekaterina Drozdovica


Updated

Signage outside the entrance of the Reserve Bank of Australia building in Sydney, Australia.
RBA determined to dampen persistent inflation – Photo: Shutterstock, Rose Makin

The Reserve Bank of Australia (RBA) hiked its policy interest rates by 25 basis points (bps) to 3.35% on 7 February 2023 to cool inflation rate, which is running hot at over 30-year highs.

The latest reading showed that price growth jumped to 7.8% in the fourth quarter of 2022 and the monthly inflation climbed to a new peak of 8.4% in December 2022, well above RBA’s inflation target range of 2-3%. Will the bank continue its aggressive monetary policy long-term?

Here we look at Australia interest rate predictions and what factors could affect the central bank’s monetary strategy at its next meeting in February 2023 and beyond. 

What is the RBA?

The Reserve Bank of Australia (RBA) is Australia’s central bank. It was founded by 1911 legislation as the Commonwealth Bank of Australia.

Two pieces of legislation passed in 1945 (the Commonwealth Bank Act and the Banking Act) formalised the bank’s power in the administration of monetary and banking policy, and exchange control. 

Under the Reserve Bank Act 1959, the original Commonwealth Bank of Australia was renamed the Reserve Bank of Australia and tasked with continuing the Commonwealth Bank's central banking functions. 

The Bank has two boards: the Reserve Bank Board and the Payments System Board. The former oversees monetary policy and financial stability, while the latter is responsible for matters relating to payments system policy.

The RBA’s main responsibility is to decide on Australia’s monetary policy, which involves determining the interest rate on overnight loans in the money market, or ‘the cash rate’.

When making monetary decisions, the RBA must adhere to three goals: to promote currency stability; to pursue full employment and economic prosperity; and to take into account the welfare of the Australian people. The RBA’s inflation target aims to maintain consumer price inflation at an average of 2%-3% over the medium term in order to meet these objectives.

The Reserve Bank Board of the RBA meets 11 times a year on the first Tuesday of each month, with the exception of January. The day after it is announced, any modification to the cash rate target goes into effect, and will have an impact on other interest rates.

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RBA historical monetary policy

During the global financial crisis of 2007-2008 and until 2010, the RBA gradually cut its cash rate from 7.25% to 3.75%. The bank then started a hiking cycle, bringing the rate to 4.75% in November 2010. The rate then kept steady, until another policy loosening period started in 2011. 

In the third quarter of 2016, the RBA began lowering its interest rate to below 2%, due to low inflation and muted labour market expansion. The bank cut its cash rate from 1.75% to 1.50% on 6 September 2016. Until May 2019, the interest rate remained at 1.50%.

Australia’s interest rate, 2000 - 2023 chart

In June 2019, the cash rate was cut by 25 basis points to 1.25%, as the Australian government wanted to support employment growth and was confident that inflation would remain within its medium-term target. 

During its meetings in July and October 2019, the RBA made two additional cuts to interest rates, bringing the cash interest rate down to 0.75% in October. The rate remained in place until February 2020.

At both the 3 March and 19 March meetings in 2020, the RBA reduced the cash rate, lowering it to 0.25%. 

On 2 March, a day before the first rate cut, the Australian Government reported the first local case of Covid-19 community transmission, which increased the case tally to 33. 

The nation’s central bank warned that uncertainty caused by the pandemic could have an impact on Australia’s economy, even though unemployment and inflation rates were still low. The RBA anticipated that in the first quarter of 2020 that the economy would be less robust than expected. 

The RBA maintained the cash rate at 0.25% from April to October 2020. It lowered the rate to 0.1% on 3 November 2020. The near-zero rate was intended to support the country’s economy, which was recovering from Covid-19 pandemic restrictions amid high unemployment rates.

At that time, Australia’s unemployment rate soared to 8% – below expectations of 10%. The RBA maintained a 0.10% cash rate for 18 months. It increased the rate in May 2022.

RBA interest rate policy in 2022 and 2023

The interest rates in Australia have gone up eight times since May 2022 for a total 300bp, lifting the cash rate from 0.1% in April to 3.10% in December, as inflation picked up. 

Amid rising energy and commodity prices brought on by Russia’s invasion of Ukraine in late February, inflation increased to 5.1% in the year to the March quarter of 2022. This surge was primarily driven by rising food and fuel prices.

The bank continued its hiking cycle into 2023, raising the rate to 3.35% in the latest February meeting. This was the ninth interest rate hike since May 2022, and the highest rate since September 2012. The RBA’s board reiterated that further hikes are likely as the central bank attempts to combat soaring inflation.

Analysts see inflation to remain above RBA’s target

Inflation has been the primary driver, forcing the RBA to rethink its approach and tighten policy. The Australian inflation forecast is key for the central bank in shaping their interest rate decisions in the future.

Australia’s Consumer Price Index (CPI) – a key gauge of inflation – soared to an annual rate of 7.8% in the final quarter of 2022, the highest since 1988, picking up from 7.3% in the quarter ending in September.

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The monthly CPI jumped to 8.4% in December 2022 year-over-year (YoY) from 7.3% in November and beat analyst expectations. 

Higher costs of dwelling construction, transportation costs, food prices, and record-high costs of holiday travel and accommodation were the main contributors for surging annual inflation in December. 

The bank predicted inflation to decline in 2023 due to global factors and slower growth in domestic demand. RBA added:

“The central forecast is for CPI inflation to decline to 4¾ per cent this year and to around 3 per cent by mid-2025. Medium-term inflation expectations remain well anchored, and it is important that this remains the case.”

As of 2 March, Dutch lender ING Group forecast Australia’s inflation to stay at an elevated level of 6.4% in the first quarter of 2023, before slowing to 5.4%, 4.1% and 2.9% in the following quarters respectively, averaging at 6.6% in 2023. In 2024 the bank expected Australian inflation to end the year at 4.7% and in 2025 and 2.5%.

The National Australia Bank (NAB) estimated inflation at 6.9% in the first quarter of 2023, as of 9 November 2022 forecast. Inflation was forecast to continue to fall to 5% and 4.3% in the final quarters of 2023 respectively. By the fourth quarter of 2024, inflation was forecast to slow to 3.1%, still above the 2% target.

Slowing economic growth

Taming inflation without causing a recession is a balancing act the central bank aims to succeed in. If the RBA is confident that the economy will remain resilient, it could be less hesitant to hike interest rates. 

In a speech on 6 December, the Reserve Bank of Australia’s Governor Phillip Lowe said the bank anticipated gross domestic product (GDP) growth of 1.50% in both 2023 and 2024. It was a downgrade from the August forecast, when the RBA predicted 1.75% growth in 2023-2024. The downward revision raised questions about whether Australia is going into recession.

“Economic growth is expected to moderate over the year ahead as the global economy slows, the bounce-back in spending on services runs its course, and growth in household consumption slows due to tighter financial conditions,” Lowe said.

Other banks also forecast the country’s economy to slow in the coming years. ING projected Australia’s GDP to slow to 2.3% in the first quarter of 2023, falling to 1.9% in the second quarter and to 1.6% in the final quarters of 2023. The bank expected the economic growth to average at 1.9% in 2023, 2% in 2024 and 3.1% in 2025. 

Meanwhile, Australian bank Westpac expected the country’s GDP to finish 2023 at 1% and reach 2% in 2024. Similarly, NAB projected the country’s economic growth to slow in 2023, reaching 0.8% in the fourth quarter before picking up to 0.9% through 2024.

Labour market to stay tight

The unemployment rate remained at 3.5% in December 2022, on high job vacancies and ongoing labour shortages, according to the Australian Labour Force Survey

The country’s central bank predicted in its November Statement of Monetary Policy that the unemployment rate will remain at 3.5% until June 2023, before picking up to 3.75% in December 2023. The bank forecast the unemployment rate to rise to 4% by June 2024 and 4.25% in December as economic growth was set to slow. 

The NAB expected an uptick in the unemployment rate to 3.6% in the first quarter of 2023, from 3.5% in the fourth quarter of 2022. The unemployment rate was expected to climb to 4.2% by the end of 2023 and to reach 4.5% in the third quarter 2024. It was projected to remain there in the final quarter of 2024.

Australia interest rate forecast for next 5 years

With expected easing inflation, an increase in the unemployment rate and slowing economic growth, what is Australia’s interest rate forecast for the next five years?

Without giving any details, Lowe said that the interest rates would need to increase further, but not on a pre-set path.

“It is closely monitoring the global economy, household spending and wage and price-setting behaviour. 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,” Lowe said.

For Australia’s interest rate prediction, the NAB expected the RBA to hike the cash rate to 3.60% in March 2023 and keep it unchanged until the end of 2023. RBA was forecast to cut the cash rate to 3.10% in March 2024 and to 2.85% in June. After that, the RBA was expected to pause for any rate adjustment and maintain the cash rate at 2.85% until December 2024.

Westpac’s Australia interest rate forecast on 3 February expected the RBA to hike the to 3.60% in March 2023 followed by a hike in June to 3.85%. The Reserve Bank of Australia was expected to pause rate adjustment and hold the cash rate at 3.85% until December 2023, before lowering the rate to 3.60% and 3.35% in March and June 2024 respectively. The bank then was expected to continue monetary loosening, bringing the rate to 3.10% in September 2024 and 2.85% in December 2024. 

The RBA interest rate was expected to rise to 3.60% in the first quarter of 2023, according to the ING’s interest rate predictions in Australia. 

The RBA was expected to hike again to 4.10% in the second quarter of 2023, keeping the rate on hold in the fourth quarter. ING then expected Australian interest rates to be cut to 3.85% in the final quarter of 2023, to 3.10% in the beginning of 2024, and to 2.35% by the end of 2024. In 2025, however, the Dutch lender expected the RBA to raise rates slightly to 2.6%.

Australia interest rate forecast: The bottom line

Analysts mentioned in this article forecast the Reserve Bank of Australia to continue hiking its cash rate in 2023. In 2024, analysts expected the RBA to begin cutting the cash rate.

Analysts did not provide Australia’s projected interest rates for the next five years after 2024 due to the various ingredients at play shaping RBA’s interest rate decisions, such as inflation, economic growth rate and unemployment. Such variables are difficult to forecast because they are affected by other factors such as energy and commodity prices, as well as global economic growth.

Keep in mind that analysts’ predictions can be wrong. Forecasts shouldn’t be used in place of your own research. Always conduct your own due diligence before trading. And never trade money that you cannot afford to lose.

FAQs

What is the interest rate in Australia?

The Reserve Bank of Australia’s (RBA) cash rate stood at 3.25% after a 25bp rate hike on 7 February 2023.

Who controls interest rates in Australia?

The country’s central bank, the Reserve Bank of Australia (RBA), adjusts interest rates in the country as a monetary policy tool to keep inflation in the target range of 2% to 3%.

How often are interest rates adjusted?

The Reserve Bank Board of the RBA meets 11 times a year on the first Tuesday of each month, with the exception of January. In each meeting, the board decides whether to raise, cut or keep the cash rate, depending on the macroeconomic indicators at the time of the meeting.

What is the future of interest rates in Australia?

Analysts expected the Reserve Bank of Australia to continue increasing its cash rate in 2023, before pausing. In 2024, analysts forecast the RBA to begin cutting the cash rate. Remember that analysts’ predictions can be wrong. Forecasts shouldn’t be used to replace your own research. Always conduct your own due diligence before trading and never trade money that you cannot afford to lose.

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The difference between trading assets and CFDs
The main difference between CFD trading and trading assets, such as commodities and stocks, is that you don’t own the underlying asset when you trade on a CFD.
You can still benefit if the market moves in your favour, or make a loss if it moves against you. However, with traditional trading you enter a contract to exchange the legal ownership of the individual shares or the commodities for money, and you own this until you sell it again.
CFDs are leveraged products, which means that you only need to deposit a percentage of the full value of the CFD trade in order to open a position. But with traditional trading, you buy the assets for the full amount. In the UK, there is no stamp duty on CFD trading, but there is when you buy stocks, for example.
CFDs attract overnight costs to hold the trades (unless you use 1-1 leverage), which makes them more suited to short-term trading opportunities. Stocks and commodities are more normally bought and held for longer. You might also pay a broker commission or fees when buying and selling assets direct and you’d need somewhere to store them safely.
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