Reserve Bank of Australia raises official interest rates again with further hikes looming
Rising inflation has triggered the third official interest rate hike in as many months, after the Reserve Bank of Australia lifted the cash rate by half a percentage point at its July monetary policy meeting.
As a result, the cash rate now sits at 1.35% – the highest point in three years. However, it’s unlikely to stay there for long, with the RBA governor, Dr Philip Lowe, giving his clearest indication yet that more hikes are coming in the near future.
“The board expects to take further steps in the process of normalising monetary conditions in Australia over the months ahead,” he said.
“The size and timing of future interest rate increases will be guided by the incoming data and the board’s assessment of the outlook for inflation and the labour market.”
How do higher rates bring down inflation?
The RBA wants to bring underlying inflation (also known as trimmed-mean inflation) back to its target range of between 2-3%.
As the graph below shows, underlying inflation climbed to an annual rate of 3.7% over the March quarter. Many experts are forecasting it to rise further when the Australian Bureau of Statistics releases the June quarter data on July 27.
Start planning your next move using one of our handy calculators.
So how might raising interest rates help bring down inflation?
Well, runaway inflation is typically a sign of an overheating economy, caused by an imbalance of supply and demand.
By raising the cash rate, the RBA is making it more expensive to borrow money. The more expensive money is, the more people will be discouraged from borrowing it. This, in theory, should decrease demand, slowing down the economy and, in turn, eventually lowering the rate of inflation.
“Inflation is forecast to peak later this year and then decline back towards the 2–3% range next year,” according to Dr Lowe.
How high will rates go?
The RBA has previously suggested that the cash rate might rise to 1.75% by the end of 2022 and 2.50% by the end of 2023.
However, the big four banks have pencilled in a faster tightening cycle:
Explaining his thinking, Bill Evans, Westpac’s chief economist, said the RBA “has clearly signalled it recognises the significant challenge of containing inflation and is prepared to act decisively”.
What does this all mean for homeowners?
If you’re on a fixed-rate home loan, you can breathe easy for the moment as your rate won’t change until your fixed period ends.
However, homeowners with variable-rate mortgages will likely see a rise in their monthly repayments, given that most lenders are likely to pass on in full any cash rate increases.
While that isn’t great news, it’s important to bear a couple of things in mind.
Firstly, as the graph below shows, before the latest round of rate hikes, the cash rate was starting from a near-zero base. As a result, it’s likely to end in a relatively low place (by historical standards) at the end of this tightening cycle.
Secondly, your lender will have ‘stress-tested’ your finances when you first applied for your home loan, to make sure you could afford much higher rates than you were initially given.
That said, that doesn’t mean you have to take higher interest rates lying down. Instead, you can get ahead of future rate rises by:
Another tip is to budget right now for future rate rises. Calculate what your monthly repayment figure would be if your interest rate increased by 1.50 percentage points, and then start making the higher payment now, by paying the extra amount into:
Worried about rising interest rates? The expert mortgage brokers at Shore Financial can help. Call us on 1300 416 700, email us on info@shorefinancial.come.au or fill in this online form to get started.
We appreciate your message and a Shore Financial Adviser will respond to you within a few short days. In the meantime, here’s a few links to keep you occupied.
We appreciate your message and a Shore Financial broker will respond to you within a few short days. In the meantime, here’s a few links to keep you occupied.
