min read
· Posted on
February 21, 2024

Interest rates May 2023: The RBA’s trying to ice out inflation

After one month off, the RBA has raised the cash rate again, this time by 0.25%. The cash rate now sits at 3.85%.

What's the key learning?

  • The RBA has just raised the official cash rate again. It’s now up by 0.25% from 3.6% to 3.85%.
  • Usually when the Reserve Bank of Australia increases the official cash rate, banks and lenders increase their home loan interest rates too.

Yep, that’s right, the cash rate is up again!

The RBA’s playing hot and cold with us, getting us feeling all warm and loved with no cash rate rises in April, and then hitting us with another one in May.

This time, the cash rate has gone up by 0.25%... from 3.6% to 3.85%.

It’s now been exactly 12 months since the RBA first started raising interest rates with the goal of slowing down inflation. 

In fact, the RBA has raised rates every month for the past year, except January (when they take a break for summer rays) and April.

But, despite inflation dropping from 7.8% in the December quarter to 7.1% in the March quarter, the economy isn’t cooling down fast enough for the RBA - who have a target inflation rate of 2-3%

And unlike over the past year when it was clear that the cash rate would rise, it’s much tougher to predict these days. 

For example, prior to the RBA announcement, CBA and Westpac forecasted that the RBA would increase rates by 0.25% and, ANZ is unsure, while NAB thought the RBA is done with rate rises till June 2024. How wrong they were!

So, what happens when interest rates rise?

When the RBA increases the cash rate, the banks will almost always follow suit and raise the interest rate on your loan. 

Experts say it takes around two or three months for individuals to feel the full impact of a rate rise on their cash flow… so the impact of these successive rises won’t be felt until the new year. 

And your interest rate on your savings account should increase too (but often doesn’t increase to the same extent).

How will the cash rate hike impact my home loan?

Here’s a breakdown of how rate rises could impact your home loan if you’ve got a variable rate:

Source: MoneySmart. Based on owner occupier loans of $500,000, $750,000 and $1,000,000 over 25 years.

Why does it feel like rates are so much higher than usual?

You’re not imagining it, they are! But it probably feels even higher because as recently as last year May, interest rates were at a historic low of 0.1%.

Here’s a recap of the rises this year:

  • May 4th 2022: 0.35%
  • June 8th 2022: 0.85%
  • July 6th 2022: 1.35%
  • August 3rd 2022: 1.85%
  • September 6th 2022: 2.35%
  • October 4th 2022: 2.60%
  • November 1st 2022: 2.85%
  • December 6th 2022: 3.1%
  • February 7th 2023: 3.35%
  • March 7th 2023: 3.60%
  • April 4th 2023: 3.60%
  • May 2nd 2023: 3.85%

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