What will it take for interest rates to fall?
Some economists are tipping cuts in the second half of 2027, but there’s no firm date for relief. Much will depend on where inflation is heading and how the economy is holding up.
So, what would give the Reserve Bank of Australia (RBA) confidence to start cutting?
The RBA increased the cash rate by 0.25 percentage points at its Melbourne Cup Day meeting on 3 November. The fifth increase this year took the cash rate to 4.85%, its highest level since 2008.
For a borrower with a $600,000 home loan and 25 years remaining when the increases began in February, Canstar estimates the latest rise would add around $92 to minimum monthly repayments if passed on in full. Across all five increases, the estimated extra repayment is $456 a month.*
Inflation remains above the RBA’s target range of 2% to 3%. In its November decision, the RBA pointed to price pressures across a broad range of goods and services, rather than higher fuel prices alone.
According to the Australian Bureau of Statistics, annual headline inflation rose to 4.3% in September, up from 4.0% in August. Annual trimmed mean inflation, a measure of underlying price pressures, was 3.6% in the September monthly CPI release.
Housing was the largest contributor to annual inflation, with costs rising 5.2%. Transport was the second-largest contributor, increasing 8.7%, driven by higher fuel prices.
Higher interest rates are intended to slow spending and ease pressure on prices. However, those effects take time to work through the economy.
The RBA would need confidence that lowering rates is consistent with bringing inflation sustainably back towards its target, while also supporting full employment. It considers the economic outlook as well as the latest figures, including developments in employment, wages and household spending.
That does not mean inflation must already be below 3% before a cut becomes possible. Equally, one lower inflation reading would not automatically trigger a reduction. The direction of inflation and the broader economic picture both matters.
One measure the RBA watches closely is the trimmed mean. While headline inflation captures price changes across the full Consumer Price Index (CPI) basket, the trimmed mean reduces the influence of unusually large rises and falls. This helps reveal the broader inflation trend.
To calculate it, the ABS ranks price changes, using seasonal adjustments where appropriate, and removes the highest and lowest 15% by expenditure weight. It then calculates a weighted average of the middle 70%.
A sustained easing in underlying inflation would help build the case for lower rates. But there is no single figure or fixed timetable that guarantees when the RBA will act.
There’s still plenty of uncertainty in the global economy. Higher energy prices linked to conflict overseas are adding to inflation pressures, making the path to lower interest rates harder to predict.
For now, economists at all four major banks don’t expect the next cash rate cut until the second half of 2027. Three have pencilled in August, while the fourth expects November.
These are forecasts, not a firm timetable. The outlook could change as new economic figures arrive or global conditions shift, and further rate rises remain possible if inflation proves harder to bring down than expected.
You don’t need to wait for a cash rate cut to find out how your home loan compares. A review can look at your interest rate, fees and loan features, along with whether the potential savings from refinancing would outweigh the costs of switching. The remaining loan term matters too, as extending it could mean paying more interest overall.
Your loan structure is another consideration. A fixed rate offers repayment certainty for a set period, usually one to five years. However, you won’t benefit from falling rates during that time, and break costs may apply if you leave the fixed-rate loan early.
A variable rate can move up or down, so repayments may change. Many variable loans offer flexibility to make extra repayments, but a cash rate cut doesn’t guarantee an equivalent reduction in your home loan rate. Your lender decides whether to change its rates and by how much.
Features such as offset accounts and redraw facilities may also be useful, depending on how you manage your money. An offset account reduces the loan balance on which interest is calculated. Redraw may allow you to access extra repayments you’ve made, subject to your loan’s conditions. Fees, interest rates and access rules all need to be considered when comparing these features.
If repayments are becoming difficult to manage, contact your lender’s hardship team early to discuss the support available. We can also help you have that conversation.
Whether you’re paying off a home loan or planning a purchase, get in touch. We can compare suitable loan options and work through what repayments could look like at different interest rates, based on your circumstances.
