In response to the pandemic, central banks around the world flooded the market with liquidity.
In Australia, the Reserve Bank did what it could to support job creation and economic recovery, setting the cash rate at an all time low of 0.25 in March 2020, and dropping it even further – to 0.1 – by November of the same year to stimulate the economy in the wake of rolling domestic lockdowns.
In announcing such a low rate, the RBA suggested that it would remain at this level until 2024. The liquidity it provided helped support the Australian economy through its recovery from a brief recession in 2020.
However, Australian has seen higher growth than expected both in employment figures and GDP. This relative success has prompted some economists to wonder whether rates will remain at such low levels for much longer.
What could rising interest rates mean for me?
If rates do rise, one of the more significant impacts will be on mortgages. The cash rate is a key component of bank’s borrowing costs and the major banks will traditionally pass on changes in the cash rate to their customers. So an increase in the cash rate could end up flowing through directly to larger mortgage repayments depending on your mortgage situation.
As part of its pandemic response the RBA instated its Term Funding Facility (TFF) in March 2020. The TFF provided low-cost funding to authorised deposit-taking institutions (ADIs) like banks for three years, allowing lenders to provide cheap mortgages, and plenty of buyers rushed to make the most of the offer. The TFF came to an end in June 2021, so as banks lose access to this cheap source of funding we may see more upwards pressure on mortgage rates.
It’s a good idea to keep an eye on your repayments, check the terms and conditions on your home loan and be ready to rework your budget or refinance your mortgage if need be. Reach out to your broker if you’d like a review of your finances.
An increased cash rate could also take some heat out of stock markets. Decreasing liquidity could see less money flowing into markets and pumping up asset prices. Investors could also interpret higher rates as a response to rising inflation and choose to shift their money into more defensive assets like gold or bonds that are better placed to weather inflation rises in the future.
The RBA is well aware of the wide-ranging effects that movements in the cash rate can have on the broader economy and household balance sheets, so it is likely to move cautiously. Australia’s economic fundamentals look solid and there have been some early signs of rising inflation, so a change of tack from the RBA remains a possibility that‘s good to consider for your personal circumstances.
If you’d like to discuss your portfolio, finances or mortgage and what changes to the rates might mean for you then please get in touch.
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