For the fifth time this year, the Reserve Bank of Australia (RBA) has raised the cash rate by 0.25 percentage points as it continues its efforts to curb inflation.
asserted
it → raise → inflation
While the effects of RBA rate decisions are most obvious in mortgage repayments, their impact extends well beyond home loans.
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impact → extend → loans
Here's a look at how the latest increase is likely to affect households, whether they're paying off a mortgage, renting, or relying on savings.
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they → affect → savings
Where does the cash rate stand now?
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rate → stand → ?
Before looking at who wins and loses from a rate rise, it's worth understanding what the cash rate actually is.
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rate → look → rise
Set by the RBA, the cash rate is Australia's official interest rate charged on unsecured overnight loans between banks.
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rate → Set → banks
Put simply, it's how much it costs banks to borrow from each other.
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it → Put → other
When the RBA lifts the cash rate, it becomes more expensive for lenders to borrow from one another.
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lenders → lift → one
To offset those higher costs, banks often look at charging customers a higher interest rate to still make a profit because they are paying more to borrow the money in the first place.
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they → offset → place
On Tuesday, the RBA increased the cash rate to 4.85 per cent to slow down inflation in the economy.
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RBA → increase → economy
PRD chief economist Diaswati Mardiasmo says the central bank has lost its patience, given inflation is on an increasing pattern.
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inflation → say → pattern
"The theory is, a higher cash rate translates into higher interest rates and mortgage repayments, which dampens household spending on other things like recreation and culture, transport, entertainment, and services," Dr Mardiasmo says.
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Mardiasmo → translate → recreation
"As demand/spending goes down, prices of the items also go down, which slows inflation overall.
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which → go → inflation
"
But that doesn't always work when there are other things in play.
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that → work → play
As an example, Dr Mardiasmo points to the war in the Middle East causing fuel prices to increase.
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prices → point → East
"So even if we don't go out to eat at restaurants as much due to paying for higher mortgage loans, we still have to pay for much more expensive fuel," she says.
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she → go → fuel
Headline inflation rose to 4.3 per cent in the year to September, up from 4.0 per cent in August.
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inflation → rise → August
Trimmed mean inflation, the RBA's preferred measure of underlying inflation, rose to an annual rate of 3.6 per cent.
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inflation → trim → cent
This means underlying inflation has sat above the RBA's 2 to 3 per cent target range for 14 consecutive months.
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inflation → mean → months
How the cash rate increase could affect you
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increase → affect → you
Rate rises are felt fastest, and most sharply, by Australians with variable-rate mortgages because banks typically pass on RBA increases in full.
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banks → feel → increases
AMP chief economist Shane Oliver says the cash rate is the main tool steering borrowing costs and households should expect lenders to adjust quickly.
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lenders → say → costs
"As we've seen with the first four hikes this year, the banks will likely announce a 0.25 per cent increase in their mortgage rates on the same day," Dr Oliver says.
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Oliver → see → day
Each 0.25 per cent rise in the cash rate adds roughly $92 per month to repayments on a $600,000 variable-rate loan with 25 years remaining.
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rise → add → years
The five 2026 increases totalling 1 per cent have added approximately $456 per month for borrowers on a $600,000 loan.
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increases → total → loan
That equates to around $5,472 extra per year.
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That → equate → year
Here's how much a November rate hike will cost borrowers:
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hike → cost → borrowers
It is not just existing mortgage borrowers hit by the rate rises though.
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It → exist → rises
For prospective buyers, Canstar estimates the borrowing capacity of someone on an average full-time wage of $108,650 would be reduced by more than $58,000, while a couple, both on average wages, would see a reduction of nearly $117,000.
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couple → estimate → 117,000
If you are on a fixed-rate home loan, you won't see any changes.
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you → fix → changes
Those rates are locked in.
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rates → lock → ?
But when the fixed term expires and rolls to a variable rate, the full impact of any rate cycle will apply at once.
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impact → fix → cycle
Some landlords may try to offset the impact of rate rises on their cash flow by increasing rent.
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landlords → try → rent
Although, there are constraints in how often and how much rent can be increased by each year in most states.
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rent → be → states
But the notion that landlords pass their increased borrowing costs onto renters has been challenged by the RBA.
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landlords → pass → RBA
Speaking on 9Now's The Pay Off podcast, RBA chief economist Sarah Hunter said what was really driving rent came down to supply and demand.
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driving → speak → supply
"If you're an individual landlord, you own one property in one rental market, you might want to put the rent up when your interest rate goes up if you've got a mortgage," Dr Hunter said.
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Hunter → own → mortgage
"But you're competing with all the other properties that are available … and so, it's demand and supply, it's the local market that will equilibrate rent.
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that → compete → rent
"If rents are tracking up, it's usually because demand growth is stronger than supply growth."
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growth → track → growth
Cotality's quarterly rental review found rents rose by 0.5 per cent nationally in the September quarter, driven by a severe lack of available stock across the country.
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rents → find → country
…and 29 more, not listed.
The Aporia
