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Unless you have been hiding under a rock, you couldn’t help but notice that interest rates went up last month, this month and more than likely they will continue to rise in the months to come.
According to Westpac’s head economist, “The unemployment rate is near a 50-year low and headed lower. Notably, the RBA’s language around the labour market strengthened today. Given this inflation and jobs backdrop and the RBA’s nervousness over inflation expectations, we believe conditions could favour another 50-basis-point move next month”.
So why do interest rates go up, seemingly in line with everything else increasing in price?
The measurement of inflation is how much ‘average’ goods like groceries, petrol and electricity have risen. Too much inflation is bad and as such, the RBA (Reserve Bank of Australia) uses interest rates as the primary tool to reduce it – kind of like using a sledgehammer to knock in a small nail. This is because when interest rates increase, people have less discretionary money to spend on these ‘average’ goods – and when less of us buy those ‘average’ things, their price invariably drops.
Simply put – if inflation goes up too quickly, then rates are sure to follow.
So why is inflation high now?
There are several reasons that are contributing to high inflation, including COVID stimulus packages, the Russia/Ukraine conflict and the fact that the current demand for goods is higher than supply.
The last time interest rates rose was around 2005 and during that time, unsurprisingly, people battened down the hatches. Then the Global Financial Crisis hit, which sent interest rates through the floor and while we don’t foresee that happening again, I am crossing my fingers just in case.
If it takes GFC #2 to make interest rates more affordable, I’m not OK with that!
So, what does this all mean for you? Well, while everyone’s circumstances are different, there are still some things we all could be doing:
- I think everyone can be more mindful of their spending.
- If your loan is still in a fixed period, please reach out to us three months before it expires
- If your loan has recently moved from fixed to variable, reach out ASAP
- Do your best to build a financial buffer
And finally, don’t make any rash decisions! Remember, the economy tends to work in cycles and while all seems a bit grim now, no doubt we will be coming out the other end before you know it.
If you have any questions, remember to hit the BOOK NOW button on our website and lock in a time to chat.