Hi, I’m business journalist Emily Stewart. I’m here to help you understand how key moments in the economy can affect you.If you have a question for me, please reach out. Thanks to everyone who has already sent questions. I have some answers below. What just happened?What? The Reserve Bank of Australia (RBA) announced the cash rate will increase by 0.25 percentage points to 4.35 per cent. ?What is the cash rate? It is often called the unofficial interest rate. It is the rate that banks pay to borrow funds from other banks. It influences all other interest rates, including our savings and mortgage rates.Why did the RBA do that? Inflation (the rate at which the prices of things increase over time) is too high at 4.6 per cent, so the central bank is using interest rates as a tool to try to slow down spending. Was it because of petrol prices? Well, sort of. Raising interest rates doesn’t directly impact what we’re paying for fuel at the bowser (that’s down to global oil prices). ?However, the high cost of fuel is starting to flow through the Australian economy — pushing up prices in a range of areas like transport, food, retail, construction and services. And that’s what the RBA is trying to counteract because if they do nothing, there’s a risk of inflation becoming a more persistent problem. What does it mean for me?Unfortunately, if you have a mortgage, your repayments will probably go up. ?However, if you have money in savings, it might be good news for you.While many banks haven’t announced how much they’ll increase the rate on deposits by, typically, it means the bank will be paying you more in interest payments on your savings.You can use the ABC’s mortgage calculator to figure out the impact on your household.Just put in your current loan size, term and interest rate to see the difference.Individual lenders decide how much of the RBA rate hike to pass on, and this estimate does not factor in any bank fees or charges, so check with your lender to get an exact amount.What can I do to save money?Check what your interest rate has risen toCompare it to other lenders and consider switching (loyalty doesn’t pay)Do a budget and work out where your money is going — knowledge is powerConsider whether an offset or redraw facility is right for you (any cash you keep in these facilities saves you interest on your loan) Think about making a small switch, which can sometimes make a big difference in the long run. For instance, changing your repayments to fortnightly (from monthly) means you make an extra repayment annually and could save you hundreds per yearFive simple steps to saving cashSaving money is not about beating yourself up. It’s also not about depriving yourself of all sources of joy.What comes next?What? The federal budget ???When? Tuesday, May 5, at 7:30pm AESTWhy is it important? This tells us how the government plans to spend its money over the coming financial year.Your questions answeredRosemary asks: Why does the RBA want to slow down spending?Emily: It’s all about controlling inflation. If households are spending more on their mortgages, they’ll have less available cash to spend on other things, so demand for some goods and services will slow down. Hopefully, that lower demand means businesses will stop raising prices. Conversely, higher demand means prices could continue rising and even become persistent inflation (which the RBA doesn’t want!)Your questions on inflation and interest rates answered.Michelle asks: While everything is going up in price, will there be a great increase in pay for workers as well as those on [welfare]?Emily: Probably not anytime soon. Wages are typically slower to rise than prices, which means we all just have less “real” purchasing power for now. However, Centrelink payments (like Jobseeker or Youth Allowance) are directly linked to inflation through indexation, and rates are adjusted twice a year (usually in March and September). The aged pension is indexed to the higher of inflation or wages growth and so tends to increase by more than other Centrelink payments. The Federal Budget is coming up next week, and the government is under pressure to increase welfare payments to keep up with the cost of living.Ingrid asks: Why doesn’t inflation itself decrease spending? Surely if prices are higher and incomes are not keeping pace with CPI, then those higher prices will cause a decrease or flattening of spending?Emily: You’d think so, wouldn’t you? But unfortunately, with prices increasing faster than incomes, workers may then seek larger wage increases, which raise firms’ costs and may lead to higher prices and it becomes something called a “wage-price spiral” or a loop. Although there was little sign of this happening during the last inflation breakout after COVID, and no sign of it yet this time around, either.Some of it also comes down to psychology, or what our inflation expectations are. So if firms and businesses believe that future prices could go higher, and then act that way (by spending now), it can ultimately push inflation up higher. Joy asks: Why does the [inflation rate] have to fall within 2 to 3 per cent?Emily: In the 1990s, the RBA (and other central banks) set an inflation target to try to keep annual consumer price inflation between 2 and 3 per cent. That target is considered low and stable inflation, which helps to maintain economic growth. Leon asks: Is it ever seriously considered to take money from all workers’ pay and inject that into their superannuation accounts? Surely, this limits spending and all workers wear the (short-term) burden rather than the heavy lifting all being done by mortgage (and other borrowers) holders.Emily: Yes, it makes sense. Forcing workers to save more money for the long term would also reduce the cash available to spend. However, it doesn’t include retirees or other people who don’t work (but still spend on goods and services), and also it’s just not likely to be politically popular. For decades now, the government has left the central bank to do the heavy lifting when it comes to tackling inflation.That’s all I have for you today. Follow me for more on personal finance, and until next time, stay sensible. ?Disclaimer: This information is just general in nature. If you need personalised financial advice, please see a professional.Loading…
