It should come as no surprise that the Reserve Bank of Australia increased the official cash rate by 0.25% in their 4th May meeting, lifting the official rate to just 0.35%. What might surprise everyone is that this is the first time rates have been increased since November 2010, some 11 and half years!
In November 2010 the Cash Rate peaked at 4.75% before rates started being reduced from November 2011, all the way to just 0.10% in November 2020 as a reaction to the economic issues surrounding the Covid-19 Pandemic.
It was inevitable that rates would rise from this extremely low point, as a strong job market and economy was leading to a rise, and the recent higher than expected inflation numbers was the tipping point to get the Reserve Bank to finally act.
The news should not be unwelcomed, nor unexpected, for borrowers as there was always going to be some point where a rate rise would come, but we are still significantly below the traditional rates and likely to enjoy rates in the lower range for some time, albeit that we expect to see one or two more rises before years end.
Fixed rates had already started rising to factor this rate movement in.
Where the news will be better received is for the many that have funds in the bank, earning little to no interest. This rate rise will at last show some nominal amount of return to deposit holders, who have been desperate for interest to help with living costs and inflation.
There has been much debate in Australia on the impact that rate rises will have on the property market, but for me I have no concerns. I look at the fact that we are still well below traditional interest rate costs, plus the fact that banks have already factored in higher rates (even much higher than this rise) in assessing lenders capacity to borrow so that only people who can afford loans with the potentially higher rates get the loans.
What this rate rise does do is remind of how fortunate we have been for the past 6 years, where we have enjoyed the official rate being below 2% and as a result most loans have been set around the 4%pa level.
Hopefully you haven’t wasted those savings and have put them to good use of additional debt reduction or investment, as that will give you a buffer moving forward.
If you would like assistance to review your current lending package to ensure you have the best interest options available to you, contact our team at finance@smats.net.
