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Ready for lift-off: how to prepare a buffer for more rate rises
May 12, 2022
The Reserve Bank of Australia (RBA) has increased the official cash rate by 25 basis points to 0.35% amid high inflation concerns and has signalled more cash rate increases will likely follow.
This is the first RBA cash rate hike since November 2010, and the first time the cash rate has moved since it was cut to a record-low 0.10% in November 2020.
The increase comes a week after Australian Bureau of Statistics (ABS) data showed the cost of living had jumped 5.1% over the past year – the highest annual increase in more than 20 years.
RBA Governor Philip Lowe said the board judged that it was the right time to begin withdrawing some of the “extraordinary monetary support” put in place to help the Australian economy during the pandemic.
“The economy has proven to be resilient and inflation has picked up more quickly, and to a higher level, than was expected,” said Governor Lowe.
Governor Lowe added that the board was committed to doing what was necessary to ensure that inflation in Australia remained in check.
“This will require a further lift in interest rates over the period ahead. The board will continue to closely monitor the incoming information and evolving balance of risks as it determines the timing and extent of future interest rate increases,” he said.
If cost of living is up, why would the RBA increase rates right now?
High inflation is bad because it means the real value of your money has dropped and you can buy less goods and services than you could previously.
High inflation also has a habit of getting out of control, because one of the drivers of inflation is people expecting inflation.
Economists would argue that raising interest rates now is a hit we have to take to ensure we don’t end up with runaway inflation (short term pain trumps long term disaster).
Higher interest rates cool inflation in a number of ways, but one of the main ways they can actually save you money right now is via the exchange rate.
If the RBA didn’t raise rates, investors would likely decide they could get better returns elsewhere around the globe, thereby lowering demand for our currency.
And if Australia’s exchange rate falls, the cost of imported goods, including the oil you fuel your car with, could go up even higher.
What does this mean for your mortgage repayments?
Well, unless you’re on a fixed-rate mortgage, it’s extremely likely the banks will follow the RBA’s lead and increase the interest rate on your home loan very soon.
How much your repayments will go up each month will depend on a number of factors, including how your particular bank responds to the cash rate increase and the size of your mortgage.
If you’re worried about what interest rate rises might mean for your monthly budget, feel free to get in touch with us today to explore some options, which could include refinancing or locking in a fixed rate ahead of any other future RBA cash rate hikes that the RBA has signalled.
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