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Australia's Interest Rate Dynamic

Unless you’ve been living under a rock this week, you’ve likely heard the news: the Reserve Bank of Australia (RBA) board opted to maintain interest rates at 4.35 per cent. While a welcome relief, it’s still a notable contrast from the 3.35 per cent recorded this time last year in February 2023.

In 2023, we saw (and felt!) five interest rate hikes, following eight in the preceding year of 2022. This string of painful announcements commenced when the RBA initiated a series of cash rate increases from May 2022. Prior to this, you’d be forgiven for forgetting the profound impact the RBA can have on our pockets, as we’d enjoyed fairly stagnant rates since November 2010.

The RBA's rate decisions aim to rein in inflationary pressures. When the RBA board decides to increase the interest rate, known more formally as the "cash rate target," it amplifies the expenses felt by our lenders, who invariably transfer these costs to us. Consequently, we tend to find ourselves with reduced discretionary spending power as we direct more of our income to our debts, and intern putting the brakes on inflation.

Australia's annual inflation rate has decreased to 4.1% during the December quarter of 2023, a significant downturn from the 7.8% recorded in the same period of 2022. The speed of this decline exceeded economists’ expectations and means we now sit at a two-year low, edging us much closer to the Reserve Bank's targeted range of 2–3%.

As signs of controlled inflation continue to emerge, we can generally anticipate relief from the relentless upward trajectory of cash hikes. This no doubt brings respite to thousands of households grappling with the cost of living and mortgage commitments.

So, what can you expect for the year ahead?  If things continue on this trajectory with inflation slowing, the RBA anticipates a return to their target 2-3% range by 2025. This optimistic forecast has promising implications for mortgage rates, with banks likely to ease rates as the RBA drops the cash rate. Let's hope we see more positive signs in the coming months. 

Continued learning:

For those intrigued by the historical context of these rate fluctuations, a detailed breakdown of each month's adjustments can be accessed here: Cash Rate Target | RBA

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