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Ramifications of recent interest rate rises

The RBA increased rates by a further 0.25% on 1 November 2022, thereby, taking the cash rate to 2.85%. It has increased rates by 2.75% since May this year, from the historical low of 0.10%, as per the table below. However, it is signalling there may be further rate increases ahead.

Effective Date

% Change

New Cash rate %

1 Nov 2022

+0.25

2.85

5 Oct 2022

+0.25

2.60

7 Sep 2022

+0.50

2.35

3 Aug 2022

+0.50

1.85

6 Jul 2022

+0.50

1.35

8 Jun 2022

+0.50

0.85

4 May 2022

+0.25

0.35

 

With these recent increases of 0.25% (October and November), the RBA has slowed the pace, after four consecutive 0.5% increases. This makes sense, because:

  • the RBA needs to allow time to assess the impact of rate increases so far, given that they impact with a lag, usually 2-3 months.
  • many households have already seen a sharp rise in mortgage payments, which will depress spending through next year. As an example, a variable rate borrower, with a $500,000 mortgage will have seen a total increase in monthly payments since May, of approximately $800 a month. That’s nearly $10,000 a year – a massive hit to household spending power.

The RBA Governor (Philip Lowe) stated that he will be “very carefully” watching how inflation evolves over summer, and that the RBA will lift interest rates aggressively in the new year, if it thinks it needs to, because it does not want high inflation to become embedded in the economy.

He added, “the consequences of allowing high inflation to persist and become entrenched in expectations are, that the eventual increase in interest rates needed to bring it down would be much greater.”

This would increase the risk of a severe recession and a sharp rise in unemployment.”

 

Author
CFP® | BSc(Ma) | Authorised Representative No. 301739

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