Interest rates and inflation where things stand as we enter 2023

Interest rates and inflation - where things stand as we roll into 2023

Dec 22, 2022 | by DiJones

In its efforts to curb spiralling inflation, the Reserve Bank of Australia (RBA) has raised interest rates every time it has met over the last eight months, bringing our cash rate up from an all-time low of 0.1% to its current level of 3.1%.

Banks have not been slow to pass these hikes on to customers who owe them money, with variable interest rates for home loans from the Big 4 banks sitting at around 6.00% at the time of writing.

Unfortunately for people saving for a deposit, the banks haven’t been quite so speedy to up the interest earnt by savers, although there has been some movement, and returns are starting to creep up after years of sluggishness.

What effect have these interest rates had on the economy and what can we expect in the early months of 2023?

Australians are still spending, but things are slowing

According to the latest media release from the Australian Bureau of Statistics (ABS)1, October 2022 saw the 20th consecutive month of increased household spending.

However, the rate of increase has started to ease and with three further interest rate rises since October, it’s expected that we will see significant slowing in the coming months as people start to cut back on the non-essentials to make sure they can cover their rising mortgage repayments.

Fixed-rate rollovers are coming

Bank data collected from the big four banks shows that a large proportion of fixed-rate loans will be rolling over to variable rates before the end of 20232, which means that a lot of mortgage holders are suddenly going to be exposed to increased repayments that their fixed rates have kept them insulated from to date.

This will naturally lead to more careful budgeting and less spending in many cases, contributing to a slowing of the economy and a slackening in the upward inflationary cycle.

As inflation slows, so too will interest rate hikes and many experts predict that the cash rate will peak early in 2023.

Where is inflation right now?

The latest data from the third quarter of the year shows that the Consumer Price Index (CPI), which measures household inflation, has climbed to 7.3%. It’s the highest rate since 1990 and stands 0.3% above the predicted 7% rate.3

And where is it heading?

Most experts agree that the upwards trend will continue for some months as it takes time for interest rate rises to take effect in the wider socio-economic community.

Monthly CPI statistics suggest that the rate of increase is slowing, and current estimates suggest that inflation will peak at 8%, with the cash rate expected to reach a high of somewhere around 3.85% in early-to-mid 2023.4

The good news for the moment is that with the RBA not convening until February 2023, we are currently in for a couple of months of relative stability and a time of reflection as new data starts to flow in to indicate how effective the RBA’s measures have been.

There is a general expectation that we will start to see the full impact of the economic tightening in the new year, something the RBA has already hinted at by reducing its rate hikes from 50 basis points to 25.

What does this all mean for mortgage holders?

For mortgage holders on variable rates, the interest rate rises over the past eight months have had a significant impact on their repayments.

For example, repayments on a $600,000 variable rate mortgage have gone up by around $950 a month since April, which adds up to around $11,400 extra a year.

In response, many mortgage holders are shopping around for lower rates and refinancing or negotiating with their banks as the fixed term portion of their home loan rolls over into the variable rate.

And for the property market in general?

Increasing interest rates make borrowing money more expensive. This means that people are not able to borrow as much and, logically, are not able to spend as much on a home as they can in periods of very low interest rates.

Many potential buyers are responding with caution to the uncertain economic conditions, and in turn, many sellers are sitting back and waiting to see where 2023 will take us.

Stock levels are lagging as a result, and properties are taking longer to sell, although auction clearance rates are slowly recovering after an October slump.

It’s an interesting time for buyers with their financing in place and sellers with a realistic attitude, and there are definite signs that, despite the downturn, there are opportunities to be had.

As for the rental market, we are seeing it tighten by the minute, with record-low vacancy rates and sharp rental increases across the country.

Despite the potential for quickly filled rental properties and high yields, investors are proving just as cautious as owner-occupiers when it comes to buying as they hold back to see how high rates will climb before committing to new purchases.

In some cases, investors are already facing rising costs from the interest rate hikes and are choosing to sell off, which is further exacerbating the shortage of available rental properties and impacting rent affordability.

Despite the recent implementation of residential tenancy reforms, we are expecting to see continued pressure on rising rents well into the new year.

A pause for reflection

So, it seems that as 2022 draws to a close, we are entering a short period of reflection as we wait for new data to show the impact of the RBA’s anti-inflationary measures.

As we push into the coming year, inflation is expected to slow and our economy to stabilise; interest rates are predicted to level out, and the housing market will once again resume its natural cycle, with buyers and sellers returning to the market with a degree of confidence underpinned by carefully regulated economic conditions, prudent investment strategies, and government schemes tailored to help Australians realise the dream of owning their own home.


Other buying, selling and investing articles and resources 

Guide to property investment success in NSW

Selling a house or apartment in NSW eBook

Buying a house or apartment in NSW eBook

Property investment in NSW FAQ’s

What is a property cycle and what drives a change? 

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