Forecast cash rate increases could add thousands to annual mortgage costs
Australian borrowers are being cautioned to prepare for higher mortgage repayments, with a former Treasury economist flagging the prospect of several Reserve Bank of Australia (RBA) cash rate increases over the coming year.
Headline and underlying inflation have both accelerated in recent months and remain above the RBA’s 2–3% target band, prompting some analysts to argue that the current cash rate settings are too loose and will need to be tightened again as early as February.
Economist Warren Hogan, now managing director at EQ Economics, warned that policy remains behind the curve and that further increases may be required over the remainder of the financial year. He argued that inflation has not been durably contained within the RBA’s band and is again moving higher.
“The logical implication of all this is interest rates are not at the right level,” he told Sky News. “No one wants to hear it, of course, and we don’t debate these things very well in our community, but the reality is interest rates are too low.”
Scenarios outlined by Hogan (pictured right) include the RBA taking the cash rate to about 4.6% next year, which would be a 15‑year high. A more aggressive path, where inflation proves harder to restrain, could see the benchmark rate pushed to 5.1% for the first time since late 2008. That would represent around six hikes from the current 3.6% level and would likely drive average variable mortgage rates above 7%.
Under this more severe outcome, repayments on a typical new loan could be about $684 a month higher than at present, leaving borrowers approximately $8,208 a year worse off.
Hogan also stressed the timing trade‑off for policymakers and households, arguing that earlier, moderate moves may avoid more disruptive tightening later.
“We’ve got to get on with it and get those rates up a little bit,” he said. “It’s their best chance of not having to raise rates a lot, you know, if they go early.”
When the RBA began easing policy in February last year, Australia’s then‑terminal cash rate of 4.35% already sat below peak post‑COVID levels in several comparable economies, including the United States, United Kingdom, Canada and New Zealand. At that time, the domestic unemployment rate was around 4.1%, remaining close to that level through May before edging slightly higher and then returning to 4.1% in December.
Market pricing currently places a significant probability on a cash rate rise at the RBA’s early‑February meeting, reflecting scepticism that inflation will return quickly to target. In its November statement on monetary policy, the central bank projected both headline and underlying inflation would only decline to about 2.6% by December 2027, implying a gradual return to the midpoint of its target band around 2028.
Despite this, the major banks are more restrained in their interest rate expectations. Commonwealth Bank, ANZ and Westpac are each projecting a single rate rise in February. NAB is more hawkish, anticipating increases in both February and May.
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