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Interest rates in Australia have been a topic of great importance in recent months – both for good and not so good reasons. In 2021, the Reserve Bank of Australia (RBA) announced that it would keep interest rates at a record low of 0.10%, to stimulate the economy in the wake of the COVID-19 pandemic – which was successful. However, in May 2022, the interest rates began to increase monthly in 0.25% and 0.50% increments, with the only pause on rate increases being in April 2023. Now, as of 3 May 2023, the RBA has raised the official cash rate again, bringing the total to 3.85%.
What are the causes for interest rate rises?
There are a number of factors that can contribute to rising interest rates, with one of the main drivers being inflation. Inflation is an economic term used to describe the sustained increase in the general price level of goods and services in an economy over time. A variety of factors can cause inflation, including an increase in demand for goods and services, a decrease in supply, or a combination of both. In Australia, inflation is on the rise which has led the RBA to raise interest rates in order to try and keep inflation under control.
The Australian economy has been performing relatively well, with strong growth in areas such as construction, mining, and agriculture. But how does this impact the interest rate rise? The strong growth has led to increased demand for labour and higher wages, which in turn can impact higher inflation and then the need for higher interest rates.
A third cause for interest rate rises is the global economic environment. Many other countries around the world have already started to raise interest rates in response to rising inflation and stronger economic growth. This has put pressure on the RBA to follow down the same path.
What do rising interest rates mean for you?
For those with savings accounts, rising interest rates would be a welcome development, as more interest would be earnt on savings. However, for those with loans, such as mortgages or car loans, rising interest rates could mean higher monthly repayments, which could be difficult for some borrowers to afford.
Here’s a hypothetical example from the Australian Finance Group (AFG) for what an interest rate rise could mean for your monthly repayments*:
In addition to the impact on borrowers and savers, rising interest rates could also have broader implications for the Australian economy. For example, the increase in interest rates could impact consumer spending, where households would have less disposable income to spend on goods and services. This could in turn lead to slower economic growth.
What can you do?
While it is difficult to predict exactly when or by how much interest rates may rise, it is important for Australians to stay informed about developments in this area and to take steps to manage their finances in a way that is resilient to potential changes in interest rates. So, what can you do?
Review your existing debts and loans This can involve looking at the terms of your mortgages, car loans, or other loans, and assessing whether they are affordable in the context of higher interest rates.
Look at opportunities to refinance existing loans This may help to secure lower interest rates and reduce monthly repayments.
Build up your savings This could involve setting up a savings account and regularly contributing to it, in order to build up a buffer of funds that could be used to cover unexpected expenses or to withstand any economic uncertainty that may arise in the future.
Talk with Biz Loan Connexion If you’re concerned about your loan or mortgage, we’re here to help. Contact us to learn how we can assist you by performing a review or financial health check of your home loan.
For more information about interest rates, please check out AFG’s Interest Rate Rise: What does this mean for me? flyer:
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* This example scenario does not account for fees or future interest rate changes and is for demonstrative purposes only.