Monday 12 September 2022

The realities of inflation, interest rates and how best to ride economic waves

As 2022 has unfolded, we have all seen the headlines regarding Australia’s inflation rate and many of us listen to the RBA’s periodic announcements with bated breath. Almost every Australian is feeling the pinch of the rising cost of living as the consumer price index soars. Accustomed as we were to the historically low interest rates, we’ve responded with everything from reservation to alarm as we’ve witnessed three consecutive rate hikes in the RBA’s efforts to curb inflationary pressure.

But what we are not remembering is that an official cash rate of 1.85% is still ridiculously low from a historical perspective. Some of us have been around long enough to remember the rates of the early 1990s, where we paid home loan interest in the high teens. And inflation and mortgage rates have continued to fluctuate all the years before and after this time.

Most of us have a decent idea of what has caused inflation to soar and much of the blame can be squarely laid on the Covid-19 pandemic. This, along with the Russian invasion of the Ukraine and the ongoing rain and flooding throughout Australia have conspired to wreak havoc with supply chain issues, and where there is heightened demand and under supply, inflation is sure to occur.

In response to the sudden inflationary pressures, the RBA has reacted quickly with its most aggressive tightening cycle in history. And whether we like it or not, lifting the cash rate to bring inflation down to its 2-3% target band is the most responsible course of action.

So what can we do to lighten the load of the increasing cost of living? Where home loans are concerned, your best bet is to shop around. Arm yourself with the knowledge of which lending house is offering the best rates out there and call your bank. Never be afraid to pick up the phone and negotiate as invariably your bank will come to the party and offer you a better deal if they think they are about to lose your business.

Be in it for the long game. As most mortgages are 25 to 30 years, much can happen to rates over this time frame. Future proof by locking in a rate that will prevent you from losing sleep every time the RBA is about to make an announcement. And remember that the flip side of inflation is that the economy is growing and people are spending. The trick is to keep any interest rate rises on the slow and steady path, which is exactly why the RBA is acting to curb any further rapid increases.

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