Has Australia hit the interest rate peak? What an RBA hold means for deposits and home loans

The Reserve Bank of Australia has held interest rates steady for two months in a row. Inflation has slowed meaningfully enough for the central bank to wait and see for now, which is great news for those struggling under the weight of rate hikes. 

However, the extended pause has reignited debate among economists, and many of the Big Four banks agree: we may have hit the cash rate peak for this cycle at 4.10%. 

So what does a rate hold mean for savers and home loan borrowers? Let’s break down what to expect when comparing interest rates.

In a post-meeting statement in August, current RBA governor Philip Lowe left room for future rate hikes, consistent with the tightening bias underpinning the board’s recent monetary policy.

“Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon the data and the evolving assessment of risks,” explained Lowe. 

Sticky services inflation and strong employment levels remain the thorniest parts of inflation, and if both persist for too long and keep inflation high, the RBA may hit the economy with one or two more rate hikes of 25 basis points.

“One of the things the RBA is trying to do is to increase unemployment, and that happens when businesses are not getting the revenue and, therefore, profits they need to sustain their operations, so they start cutting staff,” explains Mozo banking expert Peter Marshall.

An increase in unemployment would pull extra cash from the overheated economy and potentially ice out consumer spending, thus killing inflation. Of course, rising unemployment is also a classic hallmark of a recession. 

The good news is that inflation is still largely falling as it’s supposed to, even if uncertainties remain. Three of the Big Four Banks – Commonwealth Bank, ANZ, and Westpac – believe the cash rate is high enough to curb inflation and will continue to do so as the economy contracts into summer. So long as no serious and unexpected upsets pop up, a rate hold at 4.10% looks good for now.

Variable home loan interest rates are sensitive to cash rate movements: they drop when the cash rate drops, and rise when it rises. Therefore, if the cash rate remained the same and held at 4.10%, variable interest rate home loans would stay roughly where they are now. 

So while your home loan interest rate won’t likely rise, it won’t drop either. Unless you negotiate a cheaper rate or refinance, expect your mortgage repayments to stay expensive for longer. 

Marshall warns, however, that a trickle of rate rises came through during the July rate hold anyway, and lenders have been pulling discounted rates and cashback offers from the market

“A few small increases can add up,” he says.

Fixed rate home loans, however, will likely come down sooner – once lenders feel confident the rate hiking cycle is over. 

“Last month in July, there were a lot of increases and almost no cuts to fixed rate home loans,” explains Marshall. 

“That was from the expectation that the RBA is going to lift once, or even twice, more. So I think once everyone gets the message that the rate rise cycle is over, those fixed rates will start to come down again.”

At least rate hikes have been good for savers. Impressive savings account and term deposit interest rates have let banks hold onto customers who otherwise might have bailed to flee mortgage hikes. 

Mozo’s database shows the median 1-year term deposit interest rate is 4.75%. At this rate, for that term, an initial deposit of $25,000 would earn ​​$1,438 in interest.

Given the popularity of these 1-year offers, Marshall warns that we can expect them to disappear first during a rate hold. Otherwise, we’ve hit the savings rate peak, so take advantage while you can.

“Those 1-year rates are good for getting new customers: have a great special rate, get a new customer in, and then keep them once that term is finished because it’s easier to just roll over than it is to take your money elsewhere,” explains Marshall.

“But once the high rate you’re on for the next eight to twelve months is gone, you may not find something as nice.”

A rate hold will mean we get another year or so of attractive savings accounts, and any decreases shouldn’t be by much, not until the RBA gets ready to cut the cash rate. 

“When that happens, then sure, average savings rates will drop. But I think core deposit rates will stay where they are for now,” says Marshall.

Inflation is expected to hit the top of the RBA’s target band in 2025. When this happens, the RBA will likely ease its restrictive monetary policy and cut the cash rate.

The last time the RBA cut the cash rate was in November 2020, when it sent it to an all-time low of 0.10%. This was an extraordinary measure meant to jumpstart the economy during the pandemic downturn. We probably won’t see a cash rate as low as 0.10% again, but it will probably come down to ‘neutral territory’, ranging from 2% to 3%. 

Home loans usually offer interest rates a few percentage points higher than the cash rate, since banks and lenders have to price in operating costs. According to Mozo’s home loan rate tracker, historically, a 2% - 3% cash rate roughly corresponds to variable mortgage rates of 4% - 5%.

Fixed rates are predictive, so they will follow future interest rate expectations from lenders. Even before the RBA began raising the cash rate in May 2022, fixed interest rate home loans crept up as lenders braced for the oncoming hike cycle.

Once inflation shows signs of easing, long-term fixed rates will come down, followed by shorter terms as lenders regain confidence their profit margins won’t come under stress by decisions from the RBA. 

Savings interest rates typically come in just under variable mortgage rates, so a neutral cash rate could mean term deposits and savings accounts dip below 3% - 4%.

An interest rate hold provides a little bit of consistency for Australians to plan their finances. So it’s time to make hay while the sun shines on deposits – and weather the storm for home loans. 

For savers, a rate hold means it’s a great opportunity to:

• Compare your savings accounts. This means knowing your interest rate and shopping around for something better. Pay attention to the terms and conditions of a bank account so you can avoid unwanted surprises, like sneaky fees. 
• Develop a savings plan. The cost of living is still a major stress to battle, so if you haven’t already, develop a budget that works for your lifestyle so you can consistently achieve your savings goals. A budgeting app can help you track your spending automatically. 

For home loan borrowers, a rate hold could mean it’s time to:

• Compare home loans and call your lender for a better interest rate. If you’re experiencing mortgage stress, the first step is to call your lender. Arm yourself with the most competitive interest rates in the market so you have negotiating power. Most lenders would rather lose some money by giving you a cheaper interest rate than lose your business by having you refinance. 
• Make use of your offset account. If you have an offset account, now is the time to use it. Fill it up with as much of your savings as you can to save on your mortgage interest. 
• Consider refinancing your home loan. Your home loan isn’t going to improve with a rate hold, so if you’ve asked yourself if you should refinance and decided ‘yes’, shop around and make sure your money is refinance ready. 

Compare home loans in the table below.