Making sense of the interest rate rise

When it comes to today’s interest rate rise I really do feel like banging my head against the wall. Here’s my attempt to provide some context, understanding and support to you all in light of the RBA’s decision today to again increase interest rates

Why the increase?

The RBA is responsible for managing inflation which it does by increasing and decreasing interest rates. All the economic textbooks set target inflation in a steadily growing market economy at 3-3.5% per annum. This is what the RBA is trying to get Australia’s inflation back down to (we are currently under 7%).

Why don’t we want inflation to get out of control?

Best explanation is an example. In African countries where inflation runs rampant and their currency effectively becomes worthless (eg: it costs $100 for a loaf of bread). I once had a client from Zimbabwe hand me a one million dollar note, he joked about how they were all millionaires. This is of course the extreme but it is what the RBA are actively trying to mitigate.

Why is there so much anger over the interest rate increases?

There seems to be a great disconnect in the past 4-6 months between what the reality of our economy is for everyone and the RBA’s desire to reach the target inflation number. I have taken to imaging that they are just sitting there with the textbook open pointing at the 3% going “we must get this”.

It really feels like there isn’t an adult in the room right now.

I felt 3 rises ago was sufficient and we just had to wait to see how everything would settle. Now it seems likely we are going to have to navigate our businesses and lives through a massive over correction and hold our breaths for rates to be cut as soon as the RBA can see they have taken the economy too far. Most banks are expecting to see at least one rate cut by the end of 2023.

What next?

We are all likely to experience significant tightening and really have to examine our spending closely so we can meet the extra repayments on all of the debt we have. We may find it harder to sell our goods and services and you may find customers less likely to commit to contracts or longer term financial commitments. Sadly, I think it probably is going to get tough.

Everyone is in the same boat though and we are all going to have to ride this out. My advice is not to put your head in the sand about it though, be aware you may need to make quick financial decisions and if you’re going to find it tough reach out to your bank as soon as possible.

The silver lining is that this should only be for a short time and we have to hope that they know a lot the rest of us don’t and have their plan out of this.

So hold tight and reach out to your support. Use your accountants, financial planners and bankers to help you. Budget and plan.

Think about every time you were able to creatively pivot during COVID and use that energy again.

If you want help budgeting or planning your finances we’d love to help. You can book now