Interest rates Australia: RBA governor Philip Lowe reveals cash rate could hit 2.5 per cent

Reserve Bank governor Philip Lowe has given a worrying indication of how high the cash rate will go in order to keep the economy ‘on an even keel’ as cost of living soars.

The Reserve Bank of Australia has revealed interest rates will likely need to rise another 115 basis points in order to bring down the cost of living and keep the economy running smoothly.

At a speech to the Australian Strategic Business Forum in Melbourne, RBA governor Philip Lowe said the central bank had a neutral cash rate target of at least 2.5 per cent depending on inflation over the short to medium term.

A neutral rate is defined as one that neither slows down nor speeds up the economy by keeping household spending at a sustainable level.

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It comes after the RBA raised interest rates 125 basis points in a succession of monthly hits following almost 12 years of zero hikes.

The change to a 2.5 per cent cash rate would see the current average variable rate of 3.85 per cent soar to 5 per cent and would add hundreds to the cost of mortgage repayments across the country.

Analysis shows that a mortgage holder borrowing $800,000 over 25 years with a 20 per cent deposit would see monthly repayments increase more than $500, up from $4,157 to $4,677.

Mr Lowe said the neutral cash rate was a target and that whether or not interest rates would rise that high was yet to be determined.

“Two-and a half per cent is our rough estimate of the neutral rate,” Mr Lowe said.

“At some point, I imagine that rates will get to at least that level.”

“How quickly we need to get there and indeed whether we need to get there will be determined by the inflation outlook. It is coming as a shock to many people.”

Commbank chief economist Craig James said the cash rate could exceed 2.5 per cent by November this year based on CBA’s forecast, though the market was pricing in a much higher increase by the end of the year.

“Commonwealth Bank (CBA) Group economists tip 50 basis point rate hikes in August and September and a 25 basis point move in November, lifting the cash rate to 2.6 per cent,” Mr James said.

“But money market traders are pricing in a 3.5 per cent cash rate by December, fuelling fears about a potential economic slowdown.”

ANZ forecasts a cash rate of 3.35 per cent by Christmas and has tipped house prices to tumble more than its initial forecast of 15 per cent.

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Originally published as Interest rates Australia: RBA governor Philip Lowe reveals cash rate could hit 2.5 per cent