Ep3: How does the RBA 0.25% rate increase affect you?

Welcome to the weekend investor.

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I'm Max Lending, your industry insider, and we're lifting the lid on the finance market, guiding you on how to cut through the jargon, manage your finances and get investing into the property market.

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Welcome back, welcome back.

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News just in.

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Oh, look, probably about 5 days too late, but it's in.

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The RBA governor, our brand new Sandra Bullock or Michelle Bullock, whichever takes your fancy to the displeasure of Jim Chalmers and pretty much every other homeowner out there has announced a cash rate increase by .25%, taking the rate from 4.1 to 4.35.

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Now usually around the rate hikes I get a lot of the same questions from my clients, these being why are they increasing the rate?

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They're just picking on me.

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Increasing my home loans are gonna help the bloody economy.

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And Max, when do you think these rates are gonna drop?

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Sound familiar?

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Uh, look, we hear these questions a lot.

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It's probably best, though, that we start from the beginning so you can see who's involved and what does increasing the rate try to actually achieve.

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Part of the podcast's mandate is to cut through the jargon.

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So let's start with what is the RBA?

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The RBA is the Reserve Bank of Australia.

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And what does it try to achieve?

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Who knows?

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No.

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They are an independent body that sets monetary policy and they have 3 objectives.

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One, maintain economic prosperity, 2 maintain full employment, and three, the stability of the Australian currency.

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They achieve these three things by aiming to maintain an inflation rate of around about 2 to 3% per annum.

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Now they've got one main lever or 11 weapon, and that's the increase or decrease the cash rate.

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Now you're not gonna believe me, but if you've got some time to do some research into this, it's very interesting how they came up with this 2 to 3% inflation target.

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You may think it was some major mathematical equation.

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All these smart guys got into the room and they came out with the optimal inflation target.

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But in reality.

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It was just the New Zealand Reserve Bank came up with this figure back in 1989.

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It sounded not too high and not too low, and then most Western nations thought that sounds about right and they followed suit.

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If you're wondering what that pause was, it was just me shaking my head.

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Let's move on and explain what inflation is.

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In reality, it's the cost of stuff.

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Simply, inflation is the gradual loss of your purchasing power.

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When you go to the supermarket and the cheese costs you $5 last month and it's $6 this month, that's inflation.

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Your money just buys less.

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The most well-known indicator of inflation is the Consumer Price Index, also known as CPI, which measures the percentage change in the price of a basket of goods consumed by the average household.

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It measures the price fluctuations of these goods.

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From one period to the next.

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What are these goods in this metaphorical basket?

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I don't know.

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Eggs, bacon, milk, rent, petrol.

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What else can you fit in that basket?

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All right, So what causes inflation?

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It's actually a host of reasons, main ones being consumer demand, going out there actually wanting to buy things, the cost of production.

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Sometimes the price rises because the cost to supply that item increases.

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And a big one is rising wages.

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More money that you have, the more things you're going to want to buy, which increases demand and the cycle continues.

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If this is the case, then let's probably go back to what our second most popular question was.

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How is increasing the bloody home loan rate going to help the economy?

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What the RBA are doing here are actually increasing the cash rate, which is essentially one of the most direct costs to a bank when borrowing funds.

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If we take into account what we just learnt about inflation and how it mainly stems from having too much purchasing power, well, best way to zap any free cash you've got is to increase the cost of borrowed funds.

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Taking your purchasing power away, meaning your demand for goods should also go down.

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Hmm, there's some food for thought.

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Now moving on, let's do what we do best here and go through the numbers.

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Let's break down what effects, in dollar terms,A 0.25% interest rate increase would have to a home loan.

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A .25% increase will cost a loan of 600 K, which is actually the average loan size across Australia if you want to know that an extra 50.

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$100 a year or $125 a month.

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Currently the average interest rate is about 6.5.

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This is inclusive of the .25 rise we've just had.

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That's a total repayment of a whopping $3793 if you're paying PNI per month.

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Don't know about you, but that's a lot in anyone's monthly pay slip which is going towards the home loan.

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To take this full circle, only 1/3 of Australians own a home.

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By targeting the homeowners, it pushes up their home loan repayment, which will flow on to renters who have to combat with the increased rents.

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This is coming from the homeowners trying to offset the rate increase, thus taking the demand heat out of the economy.

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To the last question we get, which is do we think that we're going to see a rate drop anytime soon?

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Short answer is no.

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Sorry to be so blunt, but look, we've got two sides here that are at odds.

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The RBA is mandated to get inflation down to the 2 to 3% range as soon as possible without sort of breaking the economy.

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And on the other side, we've got the government who could assist if they wanted.

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They've just got to develop some policies.

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To help the RBA achieve their goals.

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But they're not.

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They're a newly elected government who's aiming for the popular vote at the moment.

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Is there going to be a change and are we going to see the government step in?

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Well, with Jim Chalmers, our treasurer now referring to the RBA as independent central bank, clearly they're trying to distance themselves from their decisions.

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And they're trying to come across as the good guys by pushing Philip Lowe out from doing his job to appease their supporter base.

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And I'm not sure everyone is aware that Philip Lowe didn't solely set these rates.

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He's just a figurehead of the the board, the RBA board.

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And now Michelle Sandra Bullock, who is still independent, represents the board.

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And as Mr.

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Chalmers says, the RBA is independent and if you look at the data.

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There's potentially no decrease until 2025.

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Are there any positives with a higher cash rate though?

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Hell yes, the savers.

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They're gonna get more interest on their savings accounts.

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Currently you can get around 5 to 5 1/2% in a high interest bearing savings account.

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If you're aiming to get your first home, that is fantastic as the demand heat comes out of the market and you have savings.

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Earning more every month, your savings target is going to be achieved a lot quicker.

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Now is actually the great time to sit down, look at your budget, cut back where you can and put more money into your savings account.

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Having those dollars work harder for you.

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See, it's not all doom and gloom.

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There you have it guys.

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Hopefully you learnt something today.

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Getting your financial literacy up and understanding better how the economy works, it's only going to ensure you make smarter decisions moving forward.

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You stay classy and I'll see you at the next one.

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If you have a question that you would like answered on the show about budgeting, mortgages or finance, then drop us a line either via our socials, e-mail or website.

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Details available in the show notes.

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Any opinions and views expressed in this program are just that opinions.

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All information is general in nature and should not be seen as financial, economic, legal, investment, accounting or tax advice.

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This program makes no representation or warranty as to the accuracy or completeness of any information contained in this program.

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You should consult a professional advisor in relation to your own personal circumstances.