How much did interest rates go up by? What is the RBA's new cash rate? How could it all impact you?
© Provided by ABC Business Interest rates were dropped to record lows during the pandemic. Now they’re going back up again.  (ABC News: Jessica Hinchliffe)

The Reserve Bank of Australia has raised interest rates by 0.5 percentage points, making the new cash rate 1.35 per cent.

That’s the third rate rise in three months.

Here’s a recap of what happened and it means.

Why are they raising rates?

The RBA is raising rates in a bid to slow down — but not stop — household spending, in a bid to slow the inflation rate.

The thinking is that, if more people are more reluctant to spend money, there’ll be less demand for goods and services, driving prices down.

It’s also important to remember that interest rates were dropped to record lows to shield the economy from the impacts of the COVID-19 pandemic.

They were always going to go back up.

Here’s Reserve Bank Governor Philip Lowe on that:

“The resilience of the economy and the higher inflation mean that this extraordinary support is no longer needed,” Dr Lowe said.

Why is this happening today?

The timing of today’s meeting is standard procedure.

On the first Tuesday of every month (except January), the RBA meets to decide if the cash rate needs to change.

Were we expecting this rise?

Yep.

Economists forecast today’s 0.5 percentage point rise off the back of a hike by the same amount last month.

The month before that, rates were increased by 0.25 percentage points.

How much higher could rates get?

Last month, Mr Lowe flagged that interest rates could get to 2.5 per cent at some point, but it’s unclear when that would happen.

Here’s what he said today:

“The [RBA] board expects to take further steps in the process of normalising monetary conditions in Australia over the months ahead.

“The size and timing of future interest rate increases will be guided by the incoming data and the board’s assessment of the outlook for inflation and the labour market.”

After today’s announcement, ABC finance reporter Alicia Barry said it was possible the RBA was was trying to “front-load” rate rises to begin with — hence the back-to-back 0.5 percentage point rises — and could scale it back to rate rises of 0.25 per cent increments in future.

Here’s more from Barry:

“How high interest rates go will have an effect as to how well the economy withstands this and whether we start talking about the ‘R’ word … being recession.”

 

Is Australia going to go into a recession? 

ABC business editor Ian Verrender says there’s a strong chance Australia will go into recession, but it’s hard to say when:

“Recession is a real possibility because, every time central banks globally have tried to put the brake on inflation, most of the times we’ve ended up in a recession.”

Who’s going to be hit hardest by this rise?

Verrender says it’ll most likely be younger, first home buyers:

“It’s the first-home buyers who got in last year who are the ones who are … looking at quite a lot of angst in the future here.

“While a lot of them are on fixed rates and they probably don’t run off for another year or two, they’re looking at huge increases in their repayments once those fixed rates roll off.

“The younger you are, and the more recently you’ve gotten into the housing market, the more extreme the pain is going to be.”

Will this impact people who don’t have a mortgage?

Yep.

Here’s ABC business reporter Gareth Hutchens on that:

“When the cash rate increases, it affects different people in different ways, even if you don’t have a mortgage.

“Do you have a personal loan or a car loan with a variable interest rate? If you do, your lender may choose to lift the rates on those loans by a little bit.

“Or, if you have a savings account, the interest rate on your savings could increase, which is great news for you.

“The interest rates on credit cards don’t typically respond to changes in the cash rate, but they’re exorbitantly high, regardless of what the cash rate is doing.”

Is inflation rising too?

All signs point to yes.

Late last month, Dr Lowe said he expected inflation to peak about 7 per cent in the last quarter of this year.

However, inflation is expected to drop down towards the target range of between 2 and 3 per cent next year, Dr Lowe said today.

Currently, the inflation rate is sitting at 5.1 per cent — but that’s only for the 12 months to the March 2022 quarter.

We won’t hear about the June quarter until July 27.

The inflation rate is calculated by the Australia Bureau of Statistics and is based on the prices of a basket of standard items across 11 categories, such as food and non-alcoholic beverages, housing and transport.

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