The recent rate rise explained

The Recent Interest Rate Rise Explained

Understand what is going on and the options available to you

Interest rates are going up due to the reserve bank of Australia (RBA) being scared that inflation will hurt the Australian economy. While we do have high inflation at 5.1%, we need to consider some very important points. 

Cost Push vs Demand Push Inflation

According to Investopedia 

“Cost-push inflation is the decrease in the aggregate supply of goods and services stemming from an increase in the cost of production. Demand-pull inflation is the increase in aggregate demand, categorized by the four sections of the macroeconomy: households, business, governments, and foreign buyers.”

How does all this affect your mortgage?

The last 30 years we have had demand pull inflation which is basically people getting wage increases and then spending that money on goods and services which increases the price. The RBA tries to have inflation between 2-3% which at 5.1% they are worried, and they are jacking up the interest rates since it’s the only move they have to curb inflation.

The problem we have is that the 5.1% is actually cost push inflation which is a much trickier beast to manage since the reason for the increases in price can’t really be fixed this way. The war in Ukraine and all of the sanctions in Russia has led to fuel and energy prices sky rocketing and since you need fuel to transport the basics like food, the price of food has also been lifted.

Of the 5.1% inflation increase, I believe from what I have read, over half of it can be accounted to higher gas/electricity bills, and higher fuel bills, remembering that the government put in a 22-cent discount for 6 months, so fuel is really selling for over $2.22 currently.

I don’t know about you, but it doesn’t matter if my mortgage interest rate is 3% or 4% I can’t really afford to cut back that much on house bills, fuel and food. This means increasing interest rates won’t really have much effect on cost push inflation unlike when we have the more normal demand-pull inflation. Also, if the war in Ukraine was to end tomorrow and all of the prices go back to normal, we would find our inflation rate would drop from 5.1% to under 2% since we have very limited demand pull inflation. I look at a lot of payslips and I don’t see many clients getting big pay rises on a regular basis.

Interest Rates

We are in for a world of hurt until this happens, so the variable rate is going to continue to keep increasing but the problem is the banks known this and they have already moved the fixed rates up. The variable rate will be around 3.5% for some of the big four bank and the 3-year fix is 5%. This means in the next three years we are counting on the rates to be lifted another 1.5% after already being lifted 0.75% in the last two months. 

What next?

This may happen but it comes down to when we get the cost push inflation under control and that is a tough one to gauge. If we fix now, you will be paying that extra money for the whole three years from day 1. It may also change but the 1-year fix has been holding steady at a similar interest rate as the variable since the banks want to lock clients in since they are still making money off us.

So, it may pay to hold until the variable rate hits 5% before fixing for 1 year. 

I am always happy to have a chat and explain this in greater detail and tailor the right loan structure for you.

If you have equity in your property like 20-40% then there are some amazing deals out there compared to the big four with small lenders. I’m in the process of refinancing someone who was on 3.1% about to be 3.6% with their bank to 2.01% soon to be 2.51%.