Rising Interest Rates
What Is a Cash Rate?
The RBA cash rate is used to determine the rate at which lenders pay to borrow funds from other lending institutions. It is also known as the bank rate or the base interest rate.
The Reserve Bank of Australia (RBA) is responsible for monitoring and changing the official cash rate for Australia. It can either raise, hold, or lower the official cash rate to manage the Australian economy to be more precise, inflation.
The cash rate serves as a benchmark rate for everything from mortgages and savings accounts to the exchange rate. Making it an essential tool for managing national monetary policy.
When the cash rate goes up, so do interest rates - the banks need to be making money from lending you money!
In the past 7 months, we've seen the most dramatic rise in fixed rates which have gone from roughly 2.14% to roughly 4.59% . Fixed rates are usually higher because the bank will assume that will be the cash rate at the time you finish your fixed rate period. The longer your fixed rate, the higher the rate!
Even with the rate increases, a variable rate is likely to be lower and this is exactly what we are seeing. While the variable interest rate will still be above a cash rate, there hasn't been such a drastic increase, with some variable rates as low as 2.79%. As these change so often, it can sometimes be hard to budget.
What’s causing interest rates to rise?
In short... inflation, but the long story is...
Australia has experienced strong economic growth following the pandemic which has contributed to higher inflation against the background of COVID-related disruption to supply chains. The war in Ukraine and higher wages are all leading to upward pressure on prices for resources, food, and other commodities.
Consumer prices in Australia are currently rising at an annual rate of 5.1% percent. Inflation typically makes it harder for companies to grow earnings because inputs and labour are more expensive. Consumers tend to experience a decline in real wages producing a fall in demand.
Before our first cash rate rise in May, the last hike in the cash rate was in March 2008 when it rose to 7.25 percent. These levels are still a long way from the cash rates in January 1990 when it was 17.5 percent. In this context, we’ve had several decades of declining interest rates and remain very low despite the recent lift.
Phoebe x