THE SQUIZ
As anticipated, the Reserve Bank has increased official interest rates for the 3rd consecutive month. This time, it’s a 0.5% rise taking the cash rate to 1.35%, up from 0.85% last month. It’s a long way from the historic low of 0.1% rate we had over the last couple of years, and it marks a 1.25% increase in 3 months. That makes it the most aggressive tightening of monetary policy since 1994, and they’re going to keep going up – some analysts predict they’ll end up at 3.5%. Reserve Bank Governor Philip Lowe said that the rate hike “is a further step in the withdrawal of the extraordinary monetary support that was put in place to help insure the Australian economy against the worst possible effects of the pandemic,” he said.

WHAT DOES THAT MEAN?
Lowe is saying that having rates as low as 0.1% isn’t normal – a look at this graph shows you that… That means there’s some ‘normalising’ to do, so brace for rates to keep going up in the coming months as the central bank withdraws that stimulus from the economy. But that’s not the whole story because inflation is also high on the Reserve Bank’s list of things to manage. It’s currently at 5.1%, and we’ll find out what happened during the April-June quarter later this month – but Lowe and Treasurer Jim Chalmers says it’s going to get worse (like 7-8% worse by the end of the year…) before it gets better and then down to the target rate of 2-3%. There’s no one reason why inflation is high. When you look at Australia and the world, there are supply-chain disruptions, the war in Ukraine, floods and the tight jobs market all contributing to seemingly everything costing more than a few months ago.

HOW DO INTEREST RATES HIKES FIX RISING PRICES?
So, raising interest rates acts like a handbrake on the economy – it slows things down. If borrowing money is more expensive, we punters and businesses big and small pump less cash into the economy. And if demand is down, experience tells policymakers that price rises will slow down, too – the trick is to apply the handbrake just enough so it doesn’t bring economic growth and job creation crashing down. People in the know say the economy is strong and can withstand these interest rate hikes. But here and now, many Aussies will be paying higher prices and more for their mortgage. Treasurer Chalmers’ message yesterday: things are tough, it’s going to get tougher, and then it will get better. The Coalition’s Treasury spokesman Angus Taylor said the new mob doesn’t have an economic plan for the tricky times. We’ll learn more about what Team Albanese thinks when they redo the Budget in October. In the meantime, you can calculate your new mortgage repayments here. Enjoy…