The July RBA Board meeting resulted in yet another increase in interest rates. This RBA rate increase represents the third this year – in May, June and now July. The question for those intending to purchase goods with finance and loans and for those with existing loans is – will there be more? It certainly looks like there will be, according to the statement by the Governor of the RBA, Philip Lowe, issued on July 5.
With interest rates on the rise, those considering taking on finance can consider the RBA’s outlook in timing purchases. In addition, aRBA rate increase flows-on to interest rates on many types of loans, highlighting the importance of using a finance broker to source the cheapest rates.
We provide a brief overview of the recent Reserve Bank Board statement to provide insights into what could be ahead for the economy and for lending interest rates.
Statement Announcing RBA July Rate Decision
The statement is published on the RBA website to announce the Board’s monthly decision on interest rates. The July 2022 decision was to raise the cash rate by a further 0.5% which places the cash rate at 1.35%. A significant increase from the 0.1% it had been for the 20 months up to May 2022.
The reason for these rate increases is to curtail spending and hence stop inflation rising. The RBA’s target for inflation is 2-3% but it has now hit 5.1% with expectations of 7% over the remaining period of 2022. While rate rises are intended to curb the rate, these measures take a period of time to take effect, hence why there is a time lag.
Rates are also being increased as the central bank no longer sees the necessity for extraordinary support for the economy as was initiated when a worst case situation was envisaged in the early stages of the pandemic.
It was in these early stages that the RBA started to slash interest rates, eventually to 0.1% which was a record low in Australia. The bank held firm and maintained patience as the economy rebounded in late 2021 as it wanted to be assured of sustained inflation around the 2-3% mark.
But the recovery was greater than anticipated and inflation soared over late 2021 and early 2022.
The reasons for rising inflation in Australia are attributed to both global and domestic issues. The RBA has given a number of international factors as contributors. These include ongoing pandemic caused disruptions in supply chains; war in Ukraine; global inflation; and the reduced supply capacity not meeting strong demand.
Many other countries are also responding to rising inflation by increasing their central rates. Inflation in many countries is much higher than the rate locally.
The Australian factors contributing to the surge in inflation also include reduced capacity of business to meet surging demand. This is, in part, due to the labour market conditions. Unemployment has dropped to its lowest rate in 50 years, 3.9% and the RBA expects further decrease in this rate. Businesses are facing difficulties in filling positions and this means they can’t operate to their full capacity to meet their customer demands.
Numerous flood events through 2022 are adding to rising prices and hence inflation. The RBA views the rate rises as assisting a better balance between demand and supply to be achieved. But as mentioned above, these measures have a time lag to take effect.
The Board once again mentioned the Australian economy’s resilience. It sees the rate increase for July as a further step in withdrawal pandemic-related support and returning interest rates to more normal levels.
The CPI figures for the quarter to end of June will be issued later in July and the Board states it will be guided by the data in further rate decisions. Governor Lowe said additional rises would be needed, but how much the rise would be and when it would occur would depend on the data. Tuesday 2 August is the next meeting for the Board and when the next rate decision will be made.
Significance for Loans
For individuals and businesses that already have finance which has been secured with a fixed interest rate, these increases by the RBA should not have an effect on your rate or your repayments. Loans with a variable interest rate however are subject rate fluctuations. Lenders should contact customers in this situation.
This current cycle of rising interest rates will come as a shock to many as rates have not been on the rise for many years. The situation can focus attention on ways to achieve a cheaper interest rate for that next purchase – car, business vehicles, boat, caravan, motor bike or business equipment.
Some commentators are reported as forecasting anywhere between 0.25% and 0.75% increase in the cash rate in August. How much would loan interest rates rise? That depends on the individual lender. Lenders set their rates according to their own guidelines and assessment of the market. It should be noted that the cheapest advertised rates are typically for good credit score applicants.
To see how much an interest rate rise may equate to a loan repayment rise for your particular loan, use our loan calculators. The difference in repayments on higher interest rate loans emphasises the importance of ensuring the cheapest rate is achieved.
Using the services of a finance broker such as Jade Finance can be of significant benefit in achieving this goal. Whether you are an individual purchasing a car or boat, or a business seeking equipment finance or commercial loans, our services are available to ensure that loan is secured at the cheapest possible interest rate.
July looks like certainly not being the last rate rise for 2022 and August may not be the last either. To avoid paying more than you could for your loans, speak with one of our consultant around how we can assist you.
Contact Jade Finance 1300 000 008 to discuss how we can assist you achieve the cheapest interest rate loans
DISCLAIMER: NO LIABILITY IS ACCEPTED IF ERRORS OR MISREPRESENTATIONS ARE FOUND IN THIS ARTICLE. THE ARTICLE IS PREPARED AND PRESENTED FOR GENERAL INFORMATIVE PURPOSES AND IS NOT INTENDED TO BE THE SOLE SOURCE OF INFORMATION FOR MAKING FINANCIAL DECISIONS. THOSE REQUIRING GUIDANCE AND ADVICE SHOULD CONSULT A FINANCIAL ADVISOR.