By Grace Harkins
The Reserve Bank of Australia (RBA) is Australia’s central bank and is independent from, but also accountable to, the government in power. The RBA has recently, early June, again surprised most economists, borrowers, and financial markets by raising the cash rate by 0.25 of a percentage point, pushing it to 4.1%.
What is all the fuss about?
This decision caught many off guard, as most experts anticipated that the rate would remain stable for longer than just one month. The most recent increase in June 2023 marked the 12th increase since April 2022 when interest rates were at the record-low level of 0.1%.
But What is the Cash rate, and why does it Matter?
The cash rate is, to put it simply, "the rate that banks are paid for leaving money with each other, or with the Reserve Bank, overnight," explained by economist Peter Martin. This is one of the only tools the RBA has to influence inflation. The cash rate strongly influences the interests rate from your banks. While banks are not required to follow the RBA, they frequently do so and adjust their interest rates in response.
Banks pay higher borrowing costs when the RBA raises the cash rate, and they pass these costs along to their customers in the form of increased interest rates on loans and mortgages. Borrowing is cheaper when the cash rate is low, encouraging investment and spending. On the other hand, a high cash rate makes borrowing more expensive and can therefore hinder the economy. The Australian Consumer Price Index, which is used by the RBA as a measure for inflation, is slowing down but is still uncomfortably high above 7%, well beyond the target range of 2-3%.
The RBA has signalled that “further tightening” might be necessary which would further increase stress on households already struggling with rising cost-of-living pressures with the high cost of groceries, fuel and energy.
What Does This Mean for You and What Can You Do for a Better Deal?
The rate increase will result in larger monthly payments for people who already have personal loans or mortgages, which can make it more difficult for them to stretch their student budgets. This is the area where the RBAs decision will hurt the most, with some mortgage monthly repayments increasing by more than $1000. Anneke Thompson, chief economist for CreditorWatch, noted that borrowers who had obtained a home loan during the last two years would experience the greatest pressure.
As a result of current conditions, students may be less likely to borrow money in the future, further limiting their access to it when they need it. To manage their existing repayments and financial circumstances, many people have begun refinancing their mortgages. Borrowers continue to find good deals despite the increases in the RBA's cash rate and, consequently, the banks' interest rates. There are opportunities to get lower rates because there is strong rivalry among the banks, especially the Big 4. You might find that your bank becomes suddenly more accommodating if you walk in and tell them you're considering switching your loan.
But there is good news for savers! Savings account interest rates have started to rise, which is fantastic for customers. Banks used to be slow to raise savings rates, but now they are doing so in response to customer demand for better rates and the rising cost of bank borrowing. However, keep an eye out for savings accounts with low interest rates; therefore, it's important to frequently check your rates! Some banks may offer high rates for a few months but then later lower them.
Even though the RBA's decision to raise the cash rate may have come as a surprise to many and be challenging for many Australians who were already under financial stress, the medium-term forecast is promising. The RBA's decision was made in the context of broader economic considerations, and while it might pose difficulties in the short term, it could ultimately lead to a more stable economy in the long run.
Overall, university students are expected to experience a mixed response to the RBA's decision. Students at universities should be aware of the potential effects on their financial situation. Even though the rate increase might make it harder for some students, it might also encourage saving. Look into ways to control your spending and look at ways to save money to be ready for any future adjustments and the changes to our economy.
Will this be the last increase?
After the May increase, economists are divided, particularly given that so many of them predicted the May increase incorrectly. Brendan Rynne, chief economist at KPMG, predicts that an additional increase may be required to bring inflation under control. Whereas Pradeep Philip, head of Deloitte Access Economics, described the RBAs decisions as “playing recession roulette.” Commonwealth Bank chief economist Gareth Aird, who was one of the few expert economists to predict a rate rise in May, said he expected no further increases from the RBA, however, we now know it was increased again in June. There are some forecasts that suspect we may face two to three more increases.
As you read this, the RBA may have made another decision regarding the cash rate. Whether they have increased it again or decided to keep it steady, economists and the public alike will be watching closely to see what impact it will have on the economy, inflation, and ultimately their own financial circumstances. Will the RBA roll the dice again? Only time will tell.
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