Explaining the Reserve Bank Interest Rate Rise

The Reserve Bank (RBA) Board made the decision at its meeting on Tuesday 3 May 2022 to lift the official cash rate. This decision around an interest rate rise had been widely expected to occur at the Board’s May or June meeting. The decision effectively marks the end of the recent period of historic, record low interest rates across the lending markets.

The decision to raise the cash rate also marks the first increase for 12 years. So it will be a new experience for many individuals and businesses to come to terms with. The cash rate is not of course the rate that is offered for loans for goods such as cars, boats, caravans and motorbikes or for business finance for trucks and equipment. But the cash rate does flow through to impact these lending markets.

To understand an interest rate rise and assist in making finance decisions this explainer highlights the key take-outs from RBA’s May monetary statement. The RBA Governor, Philip Lowe, issues a statement and a transcript of his address announcing the RBA Board decisions after each meeting. It is quite technical in some respects but provides important insights into the reasons behind decisions made and also gives outlooks and forecasts for key economic issues.

May Rate Decision by RBA

The decision to raise the cash rate was not in itself surprising to many as it was ‘on the cards’ for quite some time. But the major banks such as the CBA had expected the decision to come in June rather than May. Many thought the RBA would not move in May due to the Federal Election timing. But it is important to realise that the RBA is not a Government department. It is independent of Government and makes decisions based on the prevailing economic conditions.

  • The amount that the RBA raised the cash rate by – 0.25% was somewhat larger than many had expected. It takes the cash rate to 0.35% from the previous low of 0.1%
  • The key reasoning for the move as provided by the RBA and other points of interest from the accompanying statement issued include:-
  • RBA judged that the timing was seen as appropriate to commence a withdrawal of the monetary support as provided as support and stimulus mechanisms to the Australian economy during the COVID-19 pandemic. (Note that the reference to monetary support through RBA documents refers to interest rates and the bond-buying programme.)
  • The Australian economy has exhibited resilience which has resulted in a faster rise in the inflation rate than the RBA had earlier expected.
  • In conjunction with the pick-up in wages growth which has started, the timing with the inflation and employment rates as they are, is seen as right to start the process of ‘normalising’. (Note – the historic low rates as we’ve experienced and enjoyed since November 2020 were extraordinary. Introduced as part of stimulus measures to encourage especially business investment and other spending. The extraordinary period now passed, the RBA is returning rates to more normal levels.)
  • Current unemployment rate of 4% is expected to fall to 3.5% by early 2023. The expectation is it is expected to remain in the vicinity of that rate. This is the lowest rate of unemployment in approximately 50 years.
  • Positive outlook for economic growth though the RBA mentions uncertainties emanating from global activities. These global influences include the ongoing issues and disruptions caused by the pandemic overseas, especially in China which is currently seeing lockdowns in major manufacturing hubs. The war on Ukraine is also seen as a source of uncertainty as is global inflation rates.
  • Domestic impacts on inflation mentioned include the demand being strong which is placing pressures on business to supply. Business are facing issues around labour shortages which are restricting operating at peak capacities in some sectors. This is limited supply. The statement also mentions businesses passing on to consumers the costs faced by rising expenses.
  • The inflation rise has been greater and faster than the RBA previously expected. Though it does not that the rate in Australia remains at a lower level than for many other economies.
  • Inflation rises being impacted by the global issues with additional rises expected before a decline when issues around supply are resolved.
  • RBA forecast for 6% inflation and 4.75% underlying inflation in 2022. Dropping to an underlying inflation rate of 3% by the middle of 2024.
  • These inflation forecasts assume additional interest rate increases will occur.
  • The RBA has evidence that growth in wages notably through increases to wages in the private sector is occurring.

Loan and Finance Impacts

The closing sections of the RBA’s statements probably hold the key to the future for those considering loans and finance. The comments include a commitment by the RBA to do what is needed to return inflation to target and that this will require more interest rate increases.

The effects on loans and finance of the RBA increase will be widespread. The major banks were quick to respond in lifting rates in some of their home loan markets sector by the full 0.25% rise. Rises in interest rates for other types of loans including motor vehicle finance, boat loans, caravan finance and across equipment finance and other business loans would be expected.

While lending rates are set to rise and possibly several times in line with RBA decisions, Jade Finance remains well-placed to secure better rates across our lending products. With the RBA clearly eluding to further rate rises, those considering purchasing major goods with finance would be wise to proceed as soon as possible to avoid those additional increases. Fixed interest rate loans can be secured to ensure the loan repayments do not change when the RBA increases the cash rate.

Contact Jade Finance 1300 000 008 to source quotes for personal loans and business finance