The Bank of America has identified a dangerous threshold: interest rates above 5 per cent would threaten financial stability worldwide, according to Mark Cabana, the bank's head of interest rates strategy. The estimate comes as central banks globally face mounting pressure from low productivity, excess demand, artificial intelligence investment, and geopolitical tensions that are all pushing up borrowing costs.
Higher rates matter because they directly affect retirement savings and asset prices. Australian superannuation funds, which manage billions in retirement money, face growing risks as rates climb. Share markets and property prices have so far weathered recent rate increases, but that resilience may not hold if borrowing costs breach the 5 per cent mark.
The Federal Reserve recently raised America's benchmark rate by 25 basis points to a range between 3.75 per cent and 4 per cent. The Reserve Bank of Australia lifted its cash rate by the same amount to 4.6 per cent. Cabana expects rates to keep rising globally and bond yield curves to continue flattening, since current interest rate levels are not yet restrictive enough to bring down overall economic demand. Meanwhile, major Australian banks including ANZ, National Australia Bank, Commonwealth Bank, and Westpac have raised fixed mortgage rates by almost double the RBA's recent increase, compounding pressure on borrowers as funding costs deepen in a slowing economy.
Analysts warn that further rate rises would increase the risk of a loan-loss cycle in the banking sector next year, which would mark the first major downturn for banks in 35 years.