The Reserve Bank Of Australia has gone to the drawing board again, increasing the official cash rate to 0.85 per cent. This represents a substantial increase of half a percentage point and clocks a hike for a second consecutive month.
This has exceeded the predictions that economists had made and sits as the most significant single rise in cash rate that Australia has witnessed in the past 22 years. On the contrary, economists had earlier predicted an increase of 0.25 to 0.40 per cent.
The consecutive rate rises are set to add about $200 per month for a $500,000 loan when compared to the situation two months back.
Westpac was the first of the prominent banks to follow suit by announcing a 0.50% increase in home loan variable interest rates from June 21st. This will stand for both new and existing customers.
RBA governor, Philip Lowe, said in a statement, "Inflation in Australia has increased significantly. While inflation is lower than in most other advanced economies, it is higher than earlier expected. 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."
The move by the government marks a u-turn on the monetary support introduced during the pandemic. As of now, the government's priority seems to sway towards normalising existing economic conditions.
The housing market has been on a roller coaster ride in the aftermath of the pandemic, and this move will only help cool it down. The combination of low-interest rates and government stimulus had supercharged the market, and this was one of the primary concerns for the RBA. Although the housing prices have recently decreased in a few Australian markets, they are still 25 per cent higher than the pre-pandemic levels.
Inflation is a crucial concern for the RBA, and it will be closely monitoring the data in the months to come. If inflation does not taper down, we could see more rate hikes in the future. As of the March quarter, inflation stood at 5.1 per cent, and it is expected to reach 6 per cent by the end of the year. In contrast, Q4 of last year saw inflation at a manageable level of 3.5 per cent.
But not all is lost as the Australian economy has proved to be resilient, expanding by 0.8 per cent in the quarter of March with a total of 3.3 per cent to date this year. The unemployment rate is also hovering around 3.9 per cent. This is the lowest it has been for almost 50 years.
What does this mean for you?
If you have a variable home loan, your repayments are set to increase. You should contact your bank to see how much your repayments will increase by. If you are shopping for a home loan, you will have to factor in the higher interest rates.
You are protected from the rate hike if you have a fixed-rate loan, but your rates will be reset when your loan term expires. Therefore, you may want to consider fixing your loan for a longer period to protect yourself from future rate hikes.
You may also want to consider switching to a fixed-rate loan if you have a variable-rate loan. This will protect you from future interest rate hikes, but it will also mean that you will not benefit from any future interest rate cuts. You should also review your budget to see if you can afford the higher repayments. If not, you may want to consider downsizing or refinancing your loan.
Graeme John, Head of Growth at Joust opines, "The RBA’s decision was widely expected, but the announcement's timing is interesting. The RBA clearly wants to see inflation return to its 2-3 per cent target range, and this move will help them do that. But the magnitude of the rate hike may also indicate that more interest rate rises are on the horizon if inflation doesn’t start to cool down."
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