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Will interest rates go down in 2023?

It’s the question on everyone’s lips, but what does the forecast actually look like for interest rates in 2023?

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In news that will shock precisely no one, it’s been a brutal few years. After the world-rearranging havoc brought on by the global pandemic, Australians were just getting back on their feet when inflation, the cost-of-living crisis, and steady increases in interest rates have dealt another blow. Between May and December 2022, the Reserve Bank of Australia (RBA) has progressively raised the official cash rate from a historic low of 0.10 per cent to 3.10 per cent, with many experts predicting more rate increases before it stabilises. For many variable rate mortgage holders, that represents a near-doubling of repayments, and it’s little wonder that Aussies want to know when and if relief is coming.

Why have interest rates been going up?

The main reason interest rates have been on the rise is to curb inflation. Inflation refers to the increase in prices for goods and services over time. In Australia, it’s measured by the Consumer Price Index (CPI). The RBA’s aim is to keep the CPI to around 2–3 percent, but in late 2022, that number has been sitting at above 7 per cent. “We’ve seen the implications the global pandemic has had on supply chains, and also Russia’s invasion of Ukraine and the impact that that’s had on petrol prices,” says Emma Grey, Manager of Economics at Impact Economics. “All of that has led to skyrocketing inflation in Australia. So, prices of almost everything have gone up, and the RBA is using the main tool it has – raising interest rates – to try and curb it.” “What increasing interest rates in Australia does is try to limit demand – trying to reduce demand for people buying new homes, for people spending lots of money in other areas, wherever that may be, and basically trying to bring inflation down that way.”

Is there an end in sight to interest rate rises?

The RBA forecast an inflation peak of 8 per cent at the end of 2022, with predictions that it will then begin to stabilise, but Ms Grey says that so far, the aggressive rate hikes haven’t brought inflation back into step. “There’s actually no evidence that the interest rate increases are really hampering demand,” she says, “which sadly is bad news for those negatively impacted by increases in interest rates, because it means the rate rises are likely to continue into next year as well.” Ms Grey, along with a number of economic forecasters, believes we’re in for at least a few more interest rate increases in 2023. “Retail sales data is holding up strong. Wages growth data was fairly strong, although in the context of record high inflation, wages in real terms adjusted for inflation are still going backwards,” explains Ms Grey. “The labour market is also still doing really well. The unemployment rate has fallen yet again. So, it doesn’t seem like at this point, all these interest rate rises have actually been pulling demand back much. That’s why I say it’s bad news for people who are already being impacted by interest rate rises, because it basically gives the RBA more licence to keep going hard, until they can actually have more of an impact on inflation.”

What can you do about rising interest rates?

While you can’t stop interest rates increasing, refinancing your home loan or taking some time to try to negotiate a lower interest rate with your lender could help reduce some pressure on the household budget. Comparing a range of home loan products could help give you an idea of some of the potential rates available. Here are a few options to help get you started.

What factors could bring interest rates down again?

Basically, in order for interest rates to begin to come back down again, one of two things has to happen. The first scenario is that the RBA, through its rapid increases this year, could accidentally damage the economy. “The RBA has increased interest rates incredibly quickly and dramatically,” says Ms Grey, “and there has been some concern that they might actually have been going too hard, too fast, potentially slamming on the brakes on consumer demand in the economy. That would potentially contribute to our economy going backwards, into a recession.” It’s important to note, she says, that there is no evidence that this is happening, but that if the RBA did feel the approach had done damage to the Australian economy, they’d probably reduce interest rates to combat that.

The second scenario is that inflation does come back down to an acceptable level, which is what everyone is hoping for. “If inflation came right back down into the RBA’s mandated range of 2–3 per cent, then it would be, in a really simplistic explanation, ‘job done’,” Ms Grey says. “This is very unlikely, but let’s say that, because of demand hitting the floor, inflation actually suddenly becomes lower than that. If inflation fell below the RBA’s target band (which was the problem, the RBA was trying to deal with pretty much the whole decade leading up to the pandemic) then they would want to pull interest rates back down again. But we’re certainly not anywhere near a situation at the moment where anyone’s worried about inflation being too low.”

When might interest rates go down?

While rates may not go down for a while, many experts agree that they could at least stop rising in mid-to-late 2023. “Continuing to raise interest rates into next year is definitely on the cards,” says Ms Grey. “And it’s something that the RBA has flagged is likely, so we’re expecting things to probably peak around mid-to-late 2023 before stabilising – or, if they’ve gone too far, then pulling back at that point.” One thing to keep in mind is that while the increase in interest rates was quick and steep in 2022, the hikes have come off the back of record lows. This means that a return to the kind of rates we’ve seen in Australia for the past 10 years might not happen in the near future. That said, many forecasters predict that we can should be able to look forward to a period of stable interest rates once things level out.

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