Rising interest rates have been a thorn in the side of mortgage holders
But there is some good news to come from the RBA’s rate hikes.
The Reserve Bank of Australia has been lifting interest rates at a rapid pace, quickly undoing its pandemic-era cuts and pushing rates to their highest levels in more than ten years.
Each rate rise means higher mortgage repayments and more stress heaped on Australian households. But as painful as the RBA’s rate hikes are, it’s possible to make out some silver linings.
Higher rates on savings accounts and term deposits
The RBA’s rate hike campaign has been a thorn in the side of mortgage holders, but it’s been a boon for the nation’s savers, with some financial institutions offering savings accounts with rates as high as 5%. And while the higher returns likely won’t be enough to match current inflation, they can certainly help offset some of the pain.
This can be just the incentive some people need to get serious about saving. Inflation erodes the value of your hard-earned money, and if your savings account isn’t doing enough to minimise this it might be time to consider switching. When shopping around for a savings account, make sure you’re aware of any conditions (such as ongoing deposit requirements and withdrawal restrictions) and are confident you can meet them to avoid missing out on the maximum rate.
If your liquidity needs allow it, it might also be worth considering a term deposit, which involves locking your money away for a set amount of time. One thing to keep in mind, however, is that financial institutions look to the future interest rate environment when setting their term deposit rates. With many analysts expecting the RBA to begin loosening monetary policy within a year or two1, you might find that term deposit rates have already come off their peak.
Progress towards containing inflation
It’s easy to forget sometimes, but the desired outcome of tightening monetary policy isn’t to make everyday Australians miserable — it’s to help bring inflation under control. The expectation is that as the cost of borrowing goes up, consumers will respond by reining in their spending. For the RBA, this slowdown in demand is key to bringing inflation within a more manageable range.
While there’s plenty of debate around how responsive this bout of inflation has been to rising interest rates, the RBA and other experts appear confident that we’ve passed the peak. The annual inflation rate came in at 7% in the year to March, down from a 30-year high of 7.8% in the December quarter. It’s expected to keep trending downwards until it re-enters the RBA’s desired 2 to 3% target band in mid-2025.
An opportunity to reevaluate your finances
Rising interest rates can make life more difficult in the short term, but they also present an opportunity to fortify your finances against future shocks. If you don’t do so already, tracking your spending can be a good place to start. Yes, this can be tedious, but there are advantages to knowing how much money is coming and going each month — and there’s no shortage of apps out there that can help. Once you have a clear idea, you can eliminate any unnecessary expenses and commit to saving a pre-set amount of your monthly income.
Another thing you might want to consider is paying down your credit card, as well as any other high-interest debt that has the potential to snowball. Tackling these could free you up to channel more money towards your emergency fund, mortgage or offset account.
Beyond your finances, it might also be worth seeking out opportunities to upskill. Your ability to earn an income is one of the most valuable assets you have, and in an age when so many jobs are transforming or disappearing altogether it’s important to be adaptable. Growing your skillset could open new doors in your current job or help you kickstart a career in an entirely different field.
Contact Carrick Aland’s award-winning Wealth Planning team on 1300 466 998 or visit carrickaland.com.au/wealth-planning/.
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