Interest Rates: News vs Reality

The Australian housing market is feeling the burn, with builders working at 130% capacity and facing significant price surges in steel and timber. In response, the Reserve Bank of Australia (RBA) increased the cash rate by 0.5% on 8 June 2022 to cool the overheating economy.

According to Australian News, this spells doom for mortgage refinancers who bought homes at historically low, pre-covid cash rates. But before we jump to early conclusions, let’s take a step back and look at the big picture:

Pre-pandemic, the RBA’s target cash rate steadied at 1.5%. But once the pandemic emerged, the RBA lowered cash rate levels to an unprecedented 0.1%. Such cash-rate cuts are meant to put more money into Australian hands to slow down economic disruptions caused by COVID-19. 

The RBA’s job is to make targeted, cash rate adjustments to address temporary fluctuations; the keyword here being temporary! As the pandemic comes to a close, the RBA’s artificially low cash rates can’t stay the same forever. With runaway inflation causing too many hands to chase too few homes, a cash-rate hike is necessary to depress it to moderate levels.

But here’s the silver lining; like the pandemic that preceded it, this downturn is also temporary. Once the RBA’s adjustments settle in, consumer confidence will return to satisfactory levels, housing prices will start to stabilise and pressure on the building industry will start to ease. Don’t take what the media says at face value, for reality isn’t always as it seems with them!

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