Each month, the board of the Reserve Bank of Australia (RBA) meets to discuss interest rates. Generally — at least in recent years — there is no change and the cash rate is carried over from the previous month. Since Q2 2010, the cash rate has increased only once. In all other instances, it has either fallen or remained the same.

That is, until now. The RBA’s cash rate fell to an unprecedented low of 0.1% in November 2020, and it cannot go any lower than this. By May 2022, the RBA had decided that the target interest rate must increase in order to combat the unexpected rate of inflation. In June 2022, the RBA raised the rate again — the first consecutive monthly rise in more than 12 years. The days of rock bottom interest rates in Australia are over.

So, while the ruling from the RBA enables Australia’s banks to increase interest rates, effectively increasing their revenue, what does this mean for the rest of us? What does this mean for home buyers and loan applicants?

Implications for Banking Customers

It’s important to remember that the RBA does not have direct control over Australia’s banking sector. When the RBA sets rates, these are target rates only. It is still up to the individual banks and financial institutions to decide how closely they will adhere to this target.

The RBA may not have complete control, but it certainly has influence. The banks are likely to pay attention to the RBA’s actions and move accordingly, increasing their own interest rates in line with the cash target rate. As of June 2022, this cash target rate was 0.85% — up from 0.35% in May and 0.1% in April — but banks are permitted to apply far higher rates of interest than this.

This is because limits for interest rates on products like home loans are pegged to movements in the cash target rate, but they do not adhere to the target rate itself. For example, an owner-occupier principal and interest mortgage may carry an interest rate of 5.33% in accordance with the latest rises, while interest on an investment home loan may rise as high as 5.88% — this is in line with the cash rate’s increase of 50 basis points (0.5%).

Financial Institutions Are Free to Apply the Rate Rise

A number of banks have signalled that they are planning to apply the rate rise in full. In other words, they will apply the maximum permissible rate of interest to their products. This may be bad news for borrowers, who will now have to pay significantly more over the period of their loan. But it should be good news for savers, right?

Wrong — or at least, it’s not necessarily good news. While the banks are permitted to raise their own interest rates, they are not required to apply these increases uniformly across the board. While many banks are likely to increase borrowing interest to the maximum amount, they are unlikely to do the same on savings accounts. The cash target rate increase is likely to have very little positive impact on consumers at all, at least directly.

Longer-Term Optimism and Concern

While consumers will not benefit directly from the interest rate rises, it is hoped that they will benefit society as a whole in the long run. In a statement, the Governor of RBA’s Monetary Policy Division, Phillip Lowe, said that the hike was intended to curb inflation, which has risen more quickly than anticipated. Mr Lowe also said that the increase was part of the removal of the extraordinary measures implemented during the pandemic — a result of the resilience and continued growth of Australia’s economy.

Not everyone is so optimistic, however. Writing for The Saturday Paper, Richard Denniss warned that interest rate rises would “not substantially address inflation concerns“. In other words, the move would leave consumers out of pocket without improving the financial outlook of the country.

Whatever the long-term implications, one thing is for certain — Australia’s borrowers need to tread carefully in the market if they are to find a loan product that suits their needs.

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Here at Sydney Brokers, we are committed to helping our clients navigate a sometimes difficult market as they find the loan product they need. Reach out to our team and get started today. Let us help you find the best possible deal on a loan or mortgage.

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