By: Michael Crooks
For the first time in 11 years, interest rates increased. Last week, the Reserve Bank of Australia (RBA) pushed the cash rate up by 25 basis points to 35 basis points. This means that most home loans will rise by .25 per cent per year.
The decision came after it was revealed that the Australian inflation rate was 5.1 per cent – much higher than expected (although, still lower than in most advanced economies of the world).
“The board judged that now was the right time to begin withdrawing some of the extraordinary monetary support that was put in place to help the Australian economy during the pandemic,” RBA Governor Philip Lowe said in a statement.
“The economy has proven to be resilient and inflation has picked up more quickly, and to a higher level, than was expected.”
Mr Lowe also said that there was evidence that wages growth was “picking up” in Australia.
“Given this, and the very low level of interest rates, it is appropriate to start the process of normalising monetary conditions,” Mr Lowe said.
So what does that mean for Australians?
In the wake of the announcement, all four of Australia’s “big banks” (ANZ, Commonwealth, NAB and Westpac) passed on the increase to their mortgage clients. This means that at various days this month (depending on your bank), mortgage repayments will go up.
For an average mortgage of $500,000 (with 25 years of payments remaining) an extra $65 will need to be paid per month.
“We are here to help customers who have loans and are considering how repayments might change,” a Commonwealth Bank spokesperson said.
“Some options available to help our customers manage repayments include fixing or splitting loans or setting up an offset account.”
According to the RBA and experts, the rate rises won’t stop there.
“Rates will continue to rise for some time,” UNSW Business School Professor Peter Swan said.
“Many home buyers paying record prices for properties may have limited capacity to withstand high-interest rates with their repayments.”
Still, the current rate is nowhere near as high as it was in the 90s. Professor Swan pointed out that back then, when Australia was in recession, rates exceeded 25 per cent. In comparison, NAB’s standard variable home loan will be 4.77 per cent after the rise.
“Hopefully, these exceeding high rates will not return,” he said.
But Nomura Australia senior economist Andrew Ticehurst told News Corp that he expected there to be a rise each month, so that by Christmas the base rate could be at 2 per cent.
But the RBA is not flagging any such drastic response (yet).
“The board will continue to closely monitor the incoming information and evolving balance of risks as it determines the timing and extent of future interest rate increases,” Mr Lowe said.
Through rate rises, the RBA hopes to bring inflation down, and normalise the economy.
“The board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time,” Mr Lowe said.
By raising interest rates, the RBA expects inflation to drop back towards the target range of 2 to 3 per cent this year.
While many Australians are about to feel the pinch, there are thousands who will benefit from rate rises, including those with investment accounts, and those saving for a deposit to buy their first home.
Westpac announced it would increase its interest rates for “selected consumer deposit accounts” by 0.25 per cent.
Other banks are expected to follow.
Article supplied with thanks to Hope Media.