Interest rates are going up: What you can expect

We know the Reserve Bank of Australia (RBA) will be hiking interest rates over the next few years. The debate now is about when it starts the hiking cycle, how quickly it moves interest rates higher and what peak rate will be delivered.

With inflation running strongly and set to hit its highest rate in 30 years, it is obvious the monetary-policy-tightening cycle will need to deliver a hefty dose of interest rate rises before the RBA can be confident inflation will return to the 2-3 per cent target range.

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The money market futures, which price these sorts of issues into their investment decisions, are factoring in 3 percentage points of interest rate hikes by the end of 2023.

And, along the way, expect the cash rate to end 2022 at or around 2.0 per cent.

When the first rate rise does occur, it will be the first for around 12 years and, because of that, many borrowers – and savers for that matter – will need to reassess their financial position in the new era of higher interest rates.

History of rate-hiking cycles

Since the early 1990s, there have been four interest-rate-hiking cycles in Australia:

• October 2009 – November 2010: 13 months, 175 basis points of hikes taking the cash rate from 3.0 per cent to 4.75 per cent.

• May 2002 – March 2008: 5 years, 10 months, 300 basis points of hikes taking the cash rate from 4.25 per cent to 7.25 per cent.

• November 1999 – August 2000: 10 months, 150 basis points of hikes taking the cash rate from 4.75 per cent to 6.25 per cent.

• August 1994 – December 1994: 4 months, 275 basis points of hikes taking the cash rate from 4.75 per cent to 7.5 per cent.

A few issues stand out when looking at those periods where the RBA delivered interest rate hikes.

One is that the duration of the cycle, from the first to the last move, has been relatively short. Just four months in 1994, 10 months in 1999-2000 and 13 months in 2009-10. The longest cycle is almost six years, in the period 2002-2008.

The rate-hiking cycles have ranged between 150 and 300 basis points.