Rising interest rates: what it means and what you can do

Interest rates have risen again

The Reserve Bank of Australia (RBA) surprised the market when it raised the benchmark rate by 0.25%. Leading market experts and economists were expecting a 0.5% rise. The RBA has increased benchmark rates from 0.10% in May 2022 to 2.60% in October 2022 in an attempt to control inflation.

What will this mean for home borrowers?

Inflation, interest rates and unemployment are all linked together. Inflation is an increase in the price of goods, services and labour that occurs when there are more people demanding money, goods and services while not having adequate supply in the market. When inflation is greater than expected, it can cause consumers to spend more on everyday goods and debt repayments, and places pressure on savings.

How does inflation affect the economy and interest rates?

When interest rates are lowered, it is often seen as an attempt to jump start an economy that is stalling as a reflection on the economy is not growing quickly enough and/or inflation is too low. The RBA takes the opposite levers when the economy begins to run too hot. This is because fears of hyperinflation kicks in. The RBA aims to keep Australia's target consumer price index (CPI), also referred to as inflation, between 2–3% on average. The current Australian rate is sitting at 6.1% (end of June 2022 quarter) year on year. This is much higher than the RBA’s target Interest rate range, hence the rise in interest rates in the RBA’s desire to bring this number back to the 2-3% average. The Reserve Bank governor Philip Lowe cited "Today's further increase in interest rates will help achieve a more sustainable balance of demand and supply in the Australian economy. This is necessary to bring inflation back down. The Board expects to increase interest rates further over the period ahead." Australia suffers supply shortages throughout various sectors with some well documented examples including building supplies, labour and logistics. The RBA hopes that demand for goods and services lower slightly providing a chance for the supply side to catch up.

What other considerations does the RBA have?

The RBA also examines unemployment rates as a key control measure. Australia’s unemployment rates remain at historic lows at 3.5% in August 2022. The unemployment rate is defined as the percentage of the total workforce that is unemployed and actively seeking employment during the previous month. A low unemployment rate is considered healthy, and although this may not be a major consideration when raising interest rates, it would be a significant consideration when slashing rates.

I have heard whispers about a hard landing, what is it?

A hard landing is when the RBA and Government attempt to cool the economy via monetary and fiscal measures, but they push the economy too far resulting in a recession. Historically, when inflation was left to run rampant without an adequate control measurement put in place, it sent the economy into a devastating spiral. To avoid this, the RBA would be cautious in raising rates too fast, sending the Australian economy into a recession.

Are more rate hikes likely?

This will be dependant on various data points that the Reserve bank looks at when making a decision. Key dates and data points to look out for include: Australian Unemployment Rate, due to be released on 20th of October but the biggest clue will come from the quarterly Australian CPI data which will be released on the 24th of October, especially given that controlling inflation is the bank's biggest priority. The RBA will be hopeful that the previous month's rate hikes have brought key inflation numbers into line that and they do not need to raise rates so aggressively.

Using Yondr can help you manage the effects of inflation

Yondr can help you save money by simply being smarter with the money you already have. It’s easy to become discouraged with your financial circumstance and the day to day challenges of how to make ends meet. To help, Yondr’s smartphone app has a collection of simple to use digital tools to assist you in keeping hold of your money while interest rates are on the rise. Using Yondr you can save and better understand where your money is going and take control of your spending habits to achieve financial freedom.

Improve your financial position

Here are four free Yondr app features designed to help improve your financial position:

• Create virtual cards with spending limits to stay within budget
• Save money with $0 international transaction fees and competitive exchange rates
• Analyse and understand where your money is going with detailed spend analytics
• Know when you're being charged for purchases with real-time alerts on how much and where you're spending.

It’s simple to set up these key features within the Yondr app to help you stretch your dollar further and save additional money in your virtual pocket.

Join thousands of Australians who have already downloaded Yondr

‍

Things you should know

YONDR MONEY Pty Ltd ABN 11625732569 holds AFSL number 545391 and is authorised to provide general financial product advice to retail and wholesale clients. Any advice you receive from Yondr is general and does not take into account your objectives, financial situation or needs. You should consider whether the advice is suitable for you and your circumstances. Before you make any decision about whether to acquire a certain product, you should obtain and read the relevant product disclosure statement.