Many Australians are feeling the pinch of higher interest rates. If you weren’t fortunate enough to have previously fixed your home loan at a lower rate, the average variable rate is now between around 4.5% to 5.5% per annum.  

The official cash rate in Australia, as set by the Reserve Bank of Australia (RBA) is sitting at 2.85% and further increases are expected.  

High inflation is pushing interest rates higher. Australia’s inflation rate was 7.3% per annum for the September quarter, much higher than expected. Some of the items driving inflation higher are housing construction, gas prices and grocery prices. 

The RBA has a delicate situation on their hands. Higher interest rates are needed to slow inflation and bring prices down, however they don’t want to move too quickly and restrain the labour market. Higher interest rates have the intended consequence of slowing the economy, which helps fight inflation. However, at the same time it can also result in less jobs and higher unemployment. 

It’s not hard to see how higher home loan rates can slow spending in the economy. For example, a borrower with a $500,000 home loan on the average variable rate has seen their repayments increase by around $10,000 per annum since the first rate hike in May. That is $10,000 less that may have otherwise been pumped back into the economy.  

The major banks and economists are all estimating the cash rate will increase further. Two of Australia’s major banks estimate the cash rate will increase by another 1% to 3.85%. That would mean more pain for those with a mortgage. Based on these assumptions, the average variable interest rate could increase to upwards of 6.5% per annum.  These rising costs could put many Australians under financial pressure when coupling higher mortgage repayments along with general living expenses increasing. 

For those debt free, without a mortgage, rising interest rates will mean higher interest on their fixed term investments which is a good thing. Rising rates can however put downward pressure on some asset prices in the short term. 

Without the benefit of a crystal ball and knowing how inflation will behave, its very hard to predict how high rates will go but based on the current rate of inflation, it would be prudent to factor in additional rate rises of at least 1% perhaps more. This is especially important when budgeting for cash flow reasons.