For the first time in 10 years, the Reserve Bank of Australia is likely to raise the cash rate this year from its record low of 0.1 per cent.
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The rise could be as soon as Tuesday, and according to analysts is almost inevitable by next June. What has tipped the scales to make the RBA change its previous stance against raising interest rates was last week's inflation figures that showed an annual inflation rate of 5.1 per cent.
Driven by a multitude of factors - including COVID, the war in Ukraine and high oil prices - the underlying inflation rate, which excludes large seasonal price rises and falls came in at 3.7 per cent, the highest since March 2009, when interest rates were at 3.25 per cent.
According to the CEO of Horizon Bank Jon Stanfield this underlying rate of 3.7 per cent is the number that will force the RBA's hand.
"It's clear that inflation is running a lot faster than what the RBA is comfortable with and because of that there's no choice but to apply the monetary brakes by increasing interest rates," he said.
For many, this will be the first time they experience the effects of an uptick in interest rates. Homeowners are likely to feel the effects first as lenders such as banks and credit unions set their interest rates based on the RBA's cash rate.
Those with a variable rate on their mortgage are likely to see the effects flow through in the short term, however those on fixed rate mortgages will be less likely to notice immediate changes.
"Over the past 12 months we've seen a far higher than usual proportion of borrowers fix their mortgages rather than take a variable rate mortgage," Mr Stanfield said. "At some point that fixed rate rolls off and they're in for a rate shock at the end of it."
Due to years of historically low interest rates, homeowners have been able to borrow more to finance the purchase of their home, leaving some facing insolvency if they are unable to meet their repayments if interest rates rise.
In January 2022 the average home loan in NSW reached a peak of $805,888, while the last time interest rates rose, in December 2010, the average loan size in NSW was $420,730.
While this presents an issue for those who are spending a larger proportion of their income on loan repayments, Mr Stanfield said there are checks built into the system by regulators to limit individuals defaulting.
"Lenders are required to factor in a buffer on top of the actual interest rate."
In addition, as lockdowns pressed pause on large expenses such as overseas holidays and individuals saved while working from home, in the past two years more mortgage holders got ahead on their repayments, reducing their debts, Mr Stanfield said.
Other than mortgage holders, those affected by rises in the cost of living may be glad the RBA is looking to take action. Interest rates are one of the economic tools to reduce inflation as higher rates drive down consumer spending.
"All else being equal, according to the economic textbooks, prices will fall," Mr Stanfield said.
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