The RBA has increased the cash rate to 2.60 per cent.
The Reserve Bank of Australia increased the official cash rate by 25 basis points today as part of the ongoing battle to return inflation to the 2–3 per cent range.
Why do they keep raising interest rates?
Inflation is public enemy number one in economics, and the main tool Central Banks have to cool inflation is to raise interest rates. When people have less money to spend, inflation comes down. But why raise rates when people are already struggling? Because they’re trying to stop prices from increasing even further – something that’ll almost certainly happen if they do nothing. Whilst temporarily higher mortgage repayments are painful, they’re not as bad as permanently higher costs of living.
How so? Inflation in the UK is over 10 percent. With no action here we’d likely see the same thing (and we still may) Now let’s imagine if central banks do nothing, and inflation stays in double digits for the next three years – by 2025 almost everything could be 33 per cent more expensive as inflation, like interest, compounds!
Impact of inflation & interest rates
For the average borrower with a $500,000 home loan on principle and interest repayments over 30 years, today’s increase could equal an extra $74 a month ($687 extra a month since rates began increasing in May)
Rising costs also means people can borrow less and so property prices naturally come down. The same thing applies to shares, when people sell their shares and fewer people can buy them, the prices come down.
Light at the end of the tunnel?
On the positive side, for the US Fed and the RBA, inflation expectations have remained well anchored, with the market broadly believing the US Fed will achieve its inflation objective. However, it’s still trying to digest the impact of cash rate hikes on growth and earnings. There are also indications that supply chain issues are improving and commodity prices have corrected due to recession fears – both factors will help ease inflationary pressures.
That said, Philip Lowe indicated in his statement that further increases are likely to be required over the period ahead, with many economists forecasting that the official cash rate will climb to over 3 per cent by the end of the year.
If you’d like to understand what this, and any further increases mean for you, please reply to this email, please reach out. We’re here to ensure your current home loan is competitive and suits your ongoing financial situation.
03 9686 4976 | choice@choicecapital.com.au
