The Reserve Bank has announced the first interest rate increase in more than 11 years taking the cash rate up to 0.35 percent. With all major banks deciding to pass the increase on in full this will add $65 a month to repayments on a $500,000 mortgage. This coupled with high inflation presents some challenges for those with high debt levels who may have to cut back on non-essential spending.
Reserve Bank governor Philip Lowe explained that the combination of recent very high inflation numbers and evidence that workers were starting to get bigger wage increases meant the time was right for ‘normalising’ interest rates away from emergency lows introduced in the early days of the pandemic.
How quickly the cash rate takes to return to more normal levels of around 2.5 percent remains to be seen. ‘Normal’ interest rates are generally known to match the rate of inflation and the bottom line is that the cost of living is going up.
Put simply, the RBA is trying to get price increases under control by making money more expensive. With consumer prices expected to rise as much as 6 percent this year and at an annual rate of 3 percent in 2024, the interest rate hike is a mechanism to slow down spending which will prevent spiralling price rises for the long term.
The silver lining
For those who are mortgage and debt free the rising interest rates may be good news. Retirees who have cash in the bank may start to see some better returns. However, at this stage no major banks have made mention of increased savings rates.
Aspiring home buyers may potentially benefit if house prices fall because of cash rate hikes. Although it might also reduce the amount prospective buyers can borrow due to the increased lending rates.
Get advice
At times like this it is important that you remain calm and seek expert advice about your financial strategy. We can assess your situation and come up with a plan to ensure you are getting the best results in a changing environment. Get in touch.
General Advice Warning: The information provided in this article is general in nature and does not consider your particular investment objectives, financial situation, or insurance needs; we therefore recommend you seek advice tailored to your individual circumstances before making any specific decisions.
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