Interest rates have dominated the headlines the past few days, with the Reserve Bank of Australia (RBA) raising the official cash rate by 50 basis points or 0.50% up to 0.85% on Tuesday the 7th of June 2022.
So, why does this happen and what does this mean for you?
Firstly, the RBA use interest rates as a primary means of combatting inflation, which is another popular headline in Australia and globally currently. Headline inflation in Australia is currently over 5%, significantly above the target range of the RBA of around 2-3%. The impact of inflation is commonly felt in the wallet, with increases in the cost of living meaning you pay more for everyday essentials such as petrol, electricity, and food.
A rise in interest rates generally has the opposite impact on inflation by slowing the economy down through raising borrowing costs for businesses and households, as these rate rises are passed on via the banks. In practice, this reduces the surplus cash available in these business and households, and with less ability to spend, the demand in the economy decreases, generally leading to lower prices and a lower inflation rate.
So, what does this mean for the average Australian?
If you have a variable-rate mortgage or loan, you may see the impact of this in as little to a week or two when your lender chooses to pass on this interest rate rise. This may be in part or in full, depending on who you lend with. This will result in an increase to your loan repayments, which will vary based on the size of your loan and the increase in your interest rate. For a $300,000 loan with the full rise passed on, this would increase your repayments by approximately $125 per month.
For those with fixed-rate mortgages, it is likely that when it is time to renew these agreements the interest rates on offer will be significantly higher than those which you are currently locked in to.
At Elevate we see this is an important time to reassess your finances, ensuring that your household cashflow (your budget) can withstand the increase in repayments. There are simple budget calculators available on the internet, or we can assist you with this directly if you contact us.
With regards to asset prices, we hopefully see some reprieve in the cost-of-living pressures we are currently experiencing, but this is more likely to happen over time than immediately. The housing market in Hobart is difficult to predict, as we are a beautiful capital city with homes still relatively affordable compared to our mainland counterparts, but we would expect a slowdown of the significant growth in home prices that we have known in recent times.
Looking forward – the RBA is committed to its target inflation rate of 2-3%, so it is almost certain we will experience more interest rate rises over the coming 12 months to achieve this.
As your Financial Adviser, we recommend that you focus on the things in your control and take this time to reassess your spending and financial situation, and talk to us if you have any concerns.
