The Reserve Bank of Australia’s highest single-raise cash rate in 22 years leaves everyone thinking, ‘How can I handle this?’
In a statement made by RBA governor, Philip Lowe, the Board decided to increase the interest rate by 50 basis points leading to the cash rate of 0.85%. So, where does this leave you? Here’s what you need to know.
The inflation rate influences the interest rate
A significant rise in inflation pushes the RBA to increase interest rates. On the other hand, low inflation might lead to lower interest rates.
The inflation rate is the measurement of changes in the level of prices. An increase in inflation indicates that the level of prices increases but the purchasing power of money decreases.
Then, the cash rate is the interest rate for overnight loans between banks. An upward movement in the cash rate means that the cost of borrowing money becomes expensive.
Therefore, a higher inflation rate leads to a higher cash rate to help the economy slow down and restabilise.
What caused the RBA to lift the interest rate to 0.85%?
This prominent increase is associated with high inflation rates from COVID-19, the war in Ukraine, the labour market, and recent floods.
As stated by Lowe, ‘Global factors, including COVID-related disruptions to supply chains and the war in Ukraine, account for much of this increase in inflation. But domestic factors are playing a role too, with capacity constraints in some sectors and the tight labour market contributing to the upward pressure on prices. The floods earlier this year have also affected some prices.’
With the 5.1% inflation rate, many Australian families were pushed to the brink because of the surge in prices. This leads to more financial pain from paying high costs of food, electricity, gas, and other commodities.
‘Higher prices for electricity and gas and recent increases in petrol prices mean that, in the near term, inflation is likely to be higher than was expected a month ago… Today’s increase in interest rates will assist with the return of inflation to target over time,’ Lowe pointed out.
This suggests that you should brace yourself for the continuous increase in the prices of goods and services that will lead to higher rates.
But here’s the catch…
You don’t need to panic. While the hikes in inflation and interest rates might be challenging and overwhelming for some people, there are still ways to manage the current situation. We narrowed down three tips to help you make the most of the increase in interest rates:
1. Enter the property market
Are you tired of renting a place? Are you planning to finally purchase your first home? If you answer ‘yes’ to these questions, this can be the perfect opportunity for you to enter the property market.
The increase in interest rates decreases the borrowing capacity of professional investors. In turn, home prices will fluctuate, favour first-home buyers, and give them a chance.
PropTrack Home Price Index indicated that property prices in some of Australia’s cities declined from 24% to 14% in May 2022. For instance, Sydney recorded a -0.29% decline, Melbourne with -0.27%, and ACT with -0.12%.
According to Joseph Daoud, Chief Executive Officer of It’s Simple Finance, ‘This allows first home buyers to be able to enter the market at a lower price point.’
2. Assess your loans
Reviewing your loans is always a good idea, but you should consider doing it sooner than later. If you have loans, check whether they are fixed or variable rate.
- Having a fixed-rate loan ensures your repayments stay the same until the end of your term. This protects you from the interest rate that is expected to continue climbing this year. If you managed to secure lower fixed interest rates before the hikes, you do not have to worry about refinancing. In fact, you should be celebrating because you took advantage of the low interest rates before the hike.
- However, a variable rate can change anytime depending on the movement of interest rates. In other words, your repayments are lower when the rate decreases, but you pay more when it rises. With the lift of the cash rate to 0.85%, this should concern you. As stated by Joseph Daoud (MD), if you are on a variable rate, ‘You should absolutely look at refinancing as many individuals don’t know that they are no longer on the introductory rate but something called the standard variable rate, which will fluctuate more if not properly looked at or managed.’
Everyone’s financial standing is on a case-to-case basis. When refinancing, it is best to consult with financial experts to help you further assess your loans and make smarter adjustments based on your situation and goals.
3. Consider your investments
If you are looking into investing, it is highly important to assess the banks that best suit your needs before making decisions.
Term deposits usually lead to higher returns when the interest rate increases. For example, Westpac introduces a 2.25% per annum term deposit rate for 12 months effective 9 June while ANZ will offer a 2.25% term deposit rate for 11 months effective 13 June. NAB will also follow along with a term deposit rate of 2.25% on 17 June.
Daoud also recommends to ‘approach a bank that will take the highest amount of negative gearing as these banks will service you best and allow for the maximum borrowing capacity.’
“Inflation is expected to increase further, but then decline back towards the 2–3 per cent range next year,” said Lowe. With these expectations around the corner, it’s important to make smart decisions that will help you survive the surging inflation and interest rates.
Still unsure what to do next?
If you want to know more about how you can better manage your finance amidst the interest rate hikes, you can use our calculators to assess your borrowing power, loan repayments, and stamp duty. Also, our lending specialists are always available to help make things simple for you.