On the first Tuesday of every month, the RBA announces any movements in Australia’s cash rate. On the 7th February 2023, the RBA publicised the first cash rate hike of 2023 being 0.25 basis points, bringing the cash rate to 3.35%. This is the 9th consecutive month of the RBA raising the cash rate, taking the rate target to its highest level since September 2012.
So what is the likely outcome of the RBA’s cash rate movement for 2023? While no one has a crystal ball, RBA’s Governor, Philip Lowe, stated that “further increases in interest rates will be needed over the months ahead” to assist with inflation pressures. Most major economists are expecting the RBA to continue to raise the cash rate for at least the next few months by 0.25 basis points each time. The RBA will want to see Australia’s inflation rate come down before they stop raising the cash rate.
The banks use the cash rate to determine interest rates for their own products. Immediately after the RBA’s announcement, ANZ and NAB responded to the hike by increasing their rates by the same 0.25% increase. It is common for all other Australian banks to follow suit. Therefore, for any borrower on a variable loan – they will experience an increase in their loan repayments accordingly. Borrowers that elect to make principal & interest repayments will see less of their principal come off their loan, whilst the interest component increases. Borrowers on a fixed loan will need to take into account the impact to their cash flow position once their fixed term is up.
What we’ve seen so far in 2023 in relation to the property market is that it has definitely slowed down in comparison to prior periods. Below are some key factors we’ve noted in the property market:
As you can see, there is a mixed bag of influences on the property market right now. We’re not seeing a lot of pain yet, however this could change as rates continue to rise in 2023.
The monetary policy is managed by the RBA and involves setting the cash rate, which influences other economic factors such as interest rates, borrowing and lending behaviour, activity in the economy and ultimately the rate of inflation. When determining the monetary policy, the bank has a duty to contribute to the stability of the current employment levels, economic prosperity and welfare of the Australian people.
The cash rate is determined by the RBA and is reviewed monthly. Credit providers can choose to increase or decrease their interest rates in line with the cash rate.
A fixed interest rate on your loan means that you can lock in a rate for a set period, which is generally one to five years.
Advantages:
Disadvantages:
A variable interest rate is an interest rate on a loan or security that fluctuates over time.
Advantages:
Disadvantages:
Well now you are armed with the most important definitions and key concepts that relate to interest rates as well as a general overview on our 2023 predictions.
If you are a home owner with any form of loan, whether it be for your personal residence or investment property – keep track of your interest rates. Understanding the current market and expectations can assist you in budgeting for future increases and how the potential rise in repayments can affect your cash flow.
If the interest rates you are being charged don’t align with recent changes, you may be in a position to question your bank about why they aren’t following the RBA’s cash rate. Comparing rates across the market can paint a good picture of the average rate and if you fall within these ranges. If you are unsure about the rate you are being charged, or are nervous about your current or future financial situation – speak to your mortgage broker or financial advisor for advice.
On the other hand if you are about to take out a loan it's important to ensure you are taking on one that suits your situation. Again, speaking to a mortgage broker or financial adviser is a good way to do this.
Staying informed and updated is the best way to plan ahead and manage your individual situation. If you have any questions and would like to discuss your situation, our experienced team at BLG Business Advisers is here to help you out so please feel free to talk with us.
Our team are Wollongong Accountants who service right around Australia. There is no cost or commitment involved in an initial chat with us, which leaves you free to decide if we are the right fit for you.
Whatever you decide we wish you and your business every success!