What has happened?
The RBA Board has increased the cash rate by 50 basis points this Tuesday at the June Board meeting. This follows the 25 basis points increase at the May Board meeting and means an increase in the cash rate from 0.1% in April to 0.85% today.
Rates have now been increased by more than analysts’ predictions for the last two Board meetings. This shows that the RBA is moving towards more contractionary monetary policy more quickly.
What is the impact of this?
The cash rate is the rate banks use to lend to one another in the short-term money market. This is important because it determines the costs that banks will incur to funds the loans they provide to borrowers. These costs will inevitably be passed on with higher interest rates on loans.
After Tuesdays hike you will be paying about:
- $133 more per month on a $500,000 loan
- $159 more per month on a $600,000 loan
- $199 more per month on a $750,000 loan
- $265 more per month on a $1,000,000 loan
Note: this does not include the previous rate rise of 0.25% in May, meaning these increases would be 50% higher if you included both rate rises.
Why are interest rates increasing?
Interest rates are increasing almost solely due to inflation. When interest rates increase it has a couple of important effects.
A higher interest rate lowers the levels of spending and increases saving, leading to a decrease in the money supply in the economy. These factors lead to lower demand in the economy and therefore prices should decrease assuming supply stays the same.
As money becomes less ‘cheap’ people will have less purchasing power, leading to people buying less or buying more basic products. This will lead to a decrease in the overall level of prices in the economy.
What will happen in the future and what can you do?
Analysts believe that the next rate rise in July with again be 50 basis points, while Philip Lowe (the RBA governor) has indicated that the neutral interest rate would be in the region of 2.5%. For this reason, most analysts believe the cash rate will reach 2.35% in the earlier months of 2023.
Ideas to combat rising interest rates include:
- Refinance your home loan – loyalty does not pay, most new customers pay considerably lower interest rates compared to long-term customers.
- Check out your credit score – with a higher credit score you will be able to negotiate lower rates more easily. If you have a low credit score you should work to increase it.
- Use an offset account – money in an offset account will decrease the interest calculated on your loan.
- Commit to extra repayments – reducing your principal will help you reduce interest expenses and will be beneficial if you decide to refinance your loan.
For more information or assistance please contact Infinite Accounting Solutions on 02 9899 4730 or via the contact page at www.ias-ca.com.au