Interest rate forecast: How high will interest rates go in 2022?

Based on the latest RBA predictions, the cash rate in Australia is expected to climb to a peak of around 2.5%, with inflation possibly surging to 7% by the end of 2022 and not likely to fall until early in 2023.

Speaking with 7.30 in June of this year, Dr Lowe said Australians “need to be prepared for higher interest rates.”

“We had emergency settings during the pandemic, it was the right thing to do, but the emergency is over, and it’s time to remove the emergency settings and move to more normal settings of monetary policy.”

These “emergency settings” came into effect when the RBA set the cash rate at a record-low point of 0.10% in November 2020, to help mitigate the economic effects of the COVID-19 pandemic. It was not originally predicted to rise again until 2023 or 2024, but the central bank decided to act sooner in a bid to curb soaring inflation.

“The other consideration is that inflation is high,” Governor Lowe continued.

“It’s too high. At the moment it’s 5% and by the end of the year, I expect inflation to get to 7%. That’s a very high number, and we need to be able to chart a course back to 2% to 3% inflation. I’m confident that we can do that, but it’s going to take time.”

How would a cash rate hike to 2.5% affect your mortgage?

When the cash rate rises, banks and other lenders typically hike their variable home loan interest rates by the same amount or close to it. If the cash rate were to climb as high as 2.5%, as was recently predicted by the RBA, Canstar analysis shows Aussies could see their mortgage payments get significantly more expensive each month.

What would this mean for the average variable rate mortgage? We crunched the numbers to find out just how much your monthly repayments might rise, relative to the size of your home loan. The below table assumes an average variable rate of 3.62%, as this was the average on our database on July 5 2022.

Our research assumes that, if the cash rate rises to 2.5% and lenders pass this rate rise on in full, the average variable rate in Australia will be 5.27%.

This would mean people with a $500,000 home loan might find themselves paying $488 per month extra, while people with a $1.5 million mortgage could face $1,465 in additional monthly repayments, relative to the start of July.

Mortgage amount	Monthly repayments: Average variable rate 3.62%	Monthly repayments: Average variable rate 5.27%	Difference
$500,000	$2,279	$2,767	$488
$750,000	$3,418	$4,151	$733
$1,000,000	$4,558	$5,534	$976
$1,500,000	$6,837	$8,302	$1,465