The RBA raises the cash rate to 0.35% in response to concerns about increasing inflation.

The Reserve Bank of Australia (RBA) has raised the official cash rate by 25 basis points to 0.35 % in response to rising inflation concerns, and has indicated that further increases are likely.

This is the first RBA cash rate increase since November 2010, and the first since the rate was cut to a record-low 0.10 % in November 2020.

The increase comes just a week after the Australian Bureau of Statistics (ABS) reported that the cost of living had risen by 5.1 % in the previous year, the highest annual increase in more than 20 years.

RBA Governor Philip Lowe stated that the board decided it was time to begin withdrawing some of the “extraordinary monetary support” put in place to assist the Australian economy during the pandemic.

“The economy has proven to be resilient, and inflation has picked up faster and to a higher level than expected,” Governor Lowe said.

Governor Lowe went on to say that the board was committed to doing whatever it takes to maintain inflation in check in Australia.

“This will necessitate a further increase in interest rates in the coming period. As it determines the timing and extent of future interest rate increases, the board will continue to closely monitor incoming information and the evolving balance of risks,” he said.

Why would the RBA raise interest rates now, if living costs are rising?

Inflation is bad because it reduces the real value of your money, allowing you to buy fewer goods and services than before.

High inflation also has a tendency to spiral out of control, because one of the drivers of inflation is people’s expectation of inflation.

Economists argue that raising interest rates now is a necessary sacrifice to avoid runaway inflation (short term pain trumps long term disaster).

Higher interest rates can help to keep inflation at bay in a variety of ways, but one of the most important is through the exchange rate.

If the RBA does not raise interest rates, investors will likely decide that they can get better returns elsewhere in the world, lowering demand for our currency.

And if Australia’s exchange rate falls, the cost of imported goods, including the oil you use to power your car, could skyrocket.

What does this have to do with your mortgage payments?

Unless you have a fixed-rate mortgage, banks are very likely to follow the RBA’s lead and raise the interest rate on your home loan very soon.

The amount your monthly payments will rise depends on a number of factors, including how your bank reacts to the interest rate increase and the size of your mortgage.

If you’re concerned about what rising interest rates will mean for your monthly budget, contact us today to discuss your options, which could include refinancing or locking in a fixed rate ahead of any other future RBA cash rate hikes that the RBA has signaled.

To learn more, contact Premium Finance Group Australia at (07) 4720 8888 or email us at finance@pfga.com.au

Disclaimer: The content of this article is general and is presented for informative purposes. It is not intended to constitute tax or financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your situation and may not be relevant to circumstances. Before taking any action, consider your particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced, or republished without prior written consent.

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