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After enduring a tough couple of years financially, many Australians will be wondering how long interest rates will stay high and when households can expect some relief in the form of rate cuts.
There is no doubt that the Reserve Bank’s two-year monetary tightening cycle, which took the cash rate from a record low of .1% to 4.35% as of the end of 2024, is weighing heavily on consumers and businesses. Data in December showed business confidence in Australia had plunged to a 12-year low while consumer sentiment is also in pessimistic territory, largely due to rising borrowing costs and elevated prices. In fact, if it were not for government largesse through hand-outs and population growth, Australia would have slipped into a recession.
The impact was also apparent in the surprisingly sharp slow down of the Australian economy last year, when gross domestic product (GDP) advanced just 0.8% in the year to September. This was even worse than the year before, whereby the economy grew at an annual rate of 1.5%.
Most concerning have been the trimmed mean, or underlying inflation figure, which came in at 3.5%, dampening any expectations of a rate cut in 2024.
The question now is will interest rates still go down in 2025? And if so when?
Why Are Interest Rates So High?
The Reserve Bank has cited Australia’s persistently high inflation as the number-one reason behind its repeated interest rate increases that may yet tilt the economy into a recession.
The consumer price index (CPI) peaked at 7.8% in December 2022, and despite the force of the numerous interest rate hikes by the central bank, has been slow to wind down. Inflation continued to be hotter-than-expected at 3.6% in March of 2024 and has since softened to 2.8% for headline inflation for the September quarter 2024 and a trimmed mean CPI of 3.5%. The RBA’s targeted band of inflation is 2% to 3% and it is particularly focused on the trimmed mean figure.
The sluggish pace of decline in 2023 forced the central bank to resume rate hikes in November of that year—after a four-month pause— taking its cash rate to a 12-year high of 4.35%. It has remained at this level ever since.
Like its counterparts across the world, the RBA is wary of inflation expectations becoming entrenched, which would require much higher interest rates and much higher levels of unemployment to reduce.
High inflation tends to distort the economy because it results in people putting off a lot of economic activity to protect themselves from it, resulting in a waste of economic resources. It can also adversely affect productivity, reduce the value of savings, hurt household budgets, and make it harder for businesses to plan and invest.
Will They Rise Further?
Could interest rates go even higher? Most economists are doubtful this will be the case.
“It’s very unlikely that rates would rise (in 2025), as the cash rate is already in restrictive territory, evidenced by softer economic growth, curtailed household spending and disinflation,” senior ANZ economist, Adelaide Timbrell, told Forbes Advisor Australia.
“A scenario where a rate rise may occur could be if the labour market tightened or inflation reaccelerated to a concerning degree, though this is very unlikely.”
Callam Pickering, Asia-Pacific economist at jobs listing site Indeed, told Forbes Advisor that further rate hikes are unlikely as several factors would need to converge for this to happen.
“For the RBA to hike rates again next year we’d likely need to see a consumer-driven rise in service sector inflation, a federal government spending spree ahead of the election and the gap between wage growth and productivity growth widening further,” he said.
“Current economic dynamics, particularly across the labour market, don’t appear consistent with achieving the RBA’s 2% to 3% inflation target and so any factor that exacerbates that will put pressure on the RBA to respond. That said, I think the RBA will probably be resistant to pull the trigger again unless there genuinely is no alternative.
“It’s possible, but it is not a likely scenario.”
One economist who was previously bullish on the prospect of rate hikes is Judo Bank chief economic adviser, Warren Hogan. Hogan, it should be pointed out, correctly predicted 2023’s forecasts, anticipating the RBA would raise the cash rate five times to 4.35%.
Upon the release of the March CPI figures in 2024, Hogan predicted rates will reach 5.1% that year, with raises of 0.25 basis points at the RBA’s August, September and November meetings.
“Everything points to the fact that 4.35% isn’t the right level for the cash rate,” he told the AFR. Nevertheless, this hasn’t come to pass, with the RBA voting to hold the cash rate steady at 4.35% at all three meetings.
How Are Households Coping?
RBA Governor Michele Bullock has acknowledged that two years of rate hikes has been devastating to some Australians.
“…There are households really struggling to make ends meet,” she said at a press conference after the Board voted to hold the cash rate steady last May.
“These people don’t have a lot of extra savings, they might be working a second job, cutting back on discretionary items or making difficult decisions such as putting off medical appointments. These people are doing it tough and the Board and I are very conscious of that.”
A scenario where a rate rise may occur could be if the labour market tightened or inflation reaccelerated to a concerning degree, though this is very unlikely
The central bank’s 13 interest rate increases since May 2022 have resulted in some households entering mortgage stress territory. Nevertheless, mortgage defaults remain low, a fact cited by the RBA, which suggests that while many of us are feeling the pinch, we’re still hanging on.
Pickering says the RBA is unlikely to cut the cash rate until “they see sufficient progress with regards to service sector inflation and a considerable pick-up in productivity growth”.
“Not enough progress has been made on that front for the RBA to be confident in their ability to return to their 2% to 3% inflation target and more importantly stay there,” he says.
When Will Interest Rates Come Down?
While another rate hike is technically possible, some market watchers are still betting on the possibility of rate cuts in 2025. ANZ is tipping May, NAB thinks it will be in the June quarter, and Westpac also predicts May. Commonwealth Bank is the most bullish of all, arguing the RBA will cut in February.
CreditorWatch consulting chief economist, Ivan Colhoun, says a cut is more likely towards the middle of the year.
“There’s a chance that the Q1 CPI to be released in February and other economic developments might be sufficient for the Board, but the more likely timing for a first move would be in April or May,” he says.
“May would allow the Board to see two quarterly CPIs.”
ANZ’s Timbrell says while ANZ research forecasts that the RBA will cut rates in May 2025, “a February rate cut isn’t off the cards”.
“The RBA is likely to cut rates by 50 basic points in 2025, via two 25 basic point cuts in May and August.”
Pickering says: “Progress on this front has been slow, which is why many economists continue to push back expectations for the RBA to cut rates. A rate cut next year—perhaps in the first half of the year—is still possible, but it is by no means a certainty.”
Influence of Trump on Inflation and Rates
With Donald Trump returning to the White House in 2025, many are wondering what kind of impact will this have on inflation and interest rates?
“The direct impact of a Trump presidency is increased geopolitical uncertainty, since Trump is unpredictable and erratic, along with more direct impacts on global trade and currencies,” Pickering says.
“We know that Trump is protectionist and that will inevitably impact global trade and the value of key global currencies, including the Australian dollar. Generally, economic uncertainty of the negative variety increases the likelihood that rates will be cut lower than they otherwise would have been.”
Colhoun agrees that Trump’s trade agenda has the potential to be inflationary.
“Further complicating issues, there may be a near-term strengthening in manufacturing activity and orders as firms attempt to beat tariff imposition, followed by corresponding temporarily weaker activity,” he says.
“The biggest effect is likely to be a considerable period of uncertainty for business, especially in the manufacturing, wholesale, transport and warehousing and retail sectors.”
How Far Could Rates Fall?
When interest rates do start to come down, economists are convinced the decline will be gradual and nowhere close to the lows seen prior to May 2022.
“If they cut rates next year, expect them to do so in a gradual manner unless there is an emergency,” Pickering says.
“If they cut rates by 25 basis points in May (2025), then I’d expect them to follow that up with two further 25 basis point cuts in August and November. Historically the RBA has delivered rate cuts and hikes in groups, rather than one-off changes.”
Prashant Mehra contributed to this report.
Frequently Asked Questions (FAQs)
What is current interest rate in Australia?
As of December 2024, the official interest rate in Australia is 4.35%. This is the offical cash rate as set by the RBA, however, most commercial products attached to loans are much higher than this, with most homeowners facing interest rates of 6% to 7% or even higher.
Will interest rates go down in 2025?
Only time will tell. The RBA will look at a range of data when determining whether to raise, lower or hold the cash rate steady.
The major banks think rates will go down at various times in 2025. Both ANZ and Westpac are tipping rate cuts in May, while NAB predicts the June quarter and Commonwealth Bank thinks it will be as early as February.
The RBA, for the record, does not expect the inflation target in Australia to be met until 2026, however, the RBA will need to weigh up the cost of interest rate rises on the hip pockets of mortgage holders and will be wary of inflicting any un-necessary pain. Most notably, monetary policy operates with a lag, meaning that the full impact of the 13 rate rises so far may not be known for many months, and the RBA may discover too late that it’s gone too far and tipped the economy into recession.
What is the highest interest rate in Australian history?
Believe it or not, interest rates have been much, much higher than they are today. In January 1990, they hit 17.5%. The reason that a 3% interest rate is so keenly felt by mortgage holders is that borrowers are much more highly leveraged than they were thirty years ago, with properties costing 10 times the average salary in some Australian cities.
What was the lowest ever interest rate in Australia?
The RBA slashed interest rates during the Covid-19 pandemic and lockdowns to an historic .1% in November to stimulate the economy.
