Why are interest rates rising, and how does that help stop inflation?

The current inflation situation in Australia may cause some concern among the public. It has been reported that approximately 800,000 Australians will be transitioning from fixed rate home loans, which can be an intimidating prospect. However, it is important to remain calm and informed in this situation.

The inflation rate in Australia has been steadily rising in 2022, which is attributed to a number of factors, including elevated consumer spending, higher commodity prices, and disruptions in supply chains. This results in increased demand for goods and services and a willingness among consumers to pay higher prices.

According to the latest Consumer Price Index data from December 2022, the index was recorded at 130.8. The year-over-year inflation rate also showed a slight increase, reaching 7.8%, compared to the 7.3% recorded in the previous quarter.

But how does inflation affect my interest rate? 

Inflation and interest rates are closely related and can have a big impact on families with home loans. To combat inflation, central banks may raise interest rates, which can make it more expensive for people to borrow money, including for home loans. 

In Australia, the Reserve Bank of Australia (RBA) has raised the official cash rate to keep inflation within its target range of 2-3%. Meaning that borrowers with variable interest rate loans have seen an increase in their repayments, and as a consequence consumer spending is going down. For those who are currently on fixed rate home loans, the situation can be even more challenging as many are finding their interest rates tripling once their term ends. 

On the one hand, controlling inflation through higher interest rates is crucial for the long-term stability of the economy. It helps protect the value of money and ensure a more prosperous future for families and future generations. If inflation isn’t controlled, future generations face consequences such as a decline in the value of money, increased unemployment and economic instability, making it harder for people to achieve financial stability, maintain their standard of living, afford basic necessities, and save for the future. 

On the other hand, rising interest rates can cause short-term pain for families, who may struggle to keep up with increased weekly repayments.

Despite these challenges, there is a silver lining; Australia’s economy is still going strong with a 2.9% growth in GDP over the past year.

I’m on a fixed rate, how can I prepare for when my term ends?

If your fixed rate loan is soon ending and you’re worried about how you’ll meet your new monthly loan repayment, there are steps you can take to prepare your budget accordingly. A great place to start is by getting a home loan health check. At Parrington Finance, our finance brokers will assess your current home loan and help you find a solution that will keep your repayments manageable and your financial situation stable going forward. Even if your fixed rate term isn’t up for renewal for another six or twelve months, it’s still wise to book a health check and have peace of mind that you’re preparing early.