RBA lifts interest rates

For the past five months, the first Tuesday of every month has seen us here at Century 21 breathe a sigh of relief as the Reserve Bank of Australia delivered their decision to keep interest rates on hold.  We assumed that the inevitable – a change in rates – would come at some stage, however each month brought the good news that reprieve had been granted for a little while longer.   

But apparently this wasn’t to last with November bringing the (somewhat unexpected) news that the RBA had decided to lift the official cash rate by 25 basis points to 4.75 per cent after five consecutive months of keeping it on hold at 4.5 per cent. 

In his explanatory statement, Glenn Stevens, Governor of the RBA, cited the reasons for the bank’s decision.  He explained that as Australia is currently experiencing historically high terms of trade the economy is now subject to a large expansionary shock and has relatively modest amounts of spare capacity.  He also noted that there is a risk of inflation rising over the medium term. 

The board’s decision therefore was that the “balance of risks had shifted to the point where an early, modest tightening of monetary policy was prudent.”

For ordinary Australians with mortgages, the rate rise of 25 basis points will see around $50 added to the monthly repayments on an average $300,000 home loan.  However we’ve already seen two (at time of writing) of Australia’s big banks, the Commonwealth Bank and ANZ, raise the rates on their standard variable home loans by significantly more than the RBA. 

This rate rise therefore has the potential to make things difficult for many Australian families leading into Christmas and perhaps next year as well, as the possibility for further rate increases remains. 

So what can mortgage holders do to lessen the blow? I for one am a firm believer in the effectiveness of forward thinking and practical household budget management. 

It could be an incredibly worthwhile exercise to sit down and plan out your month to month expenses as well in advance as is possible.  By factoring in any expenses that you know are coming, such as water and electricity bills and home loan repayments, you will be able to reduce the likelihood of overspending and be in a better position to incorporate the additional mortgage repayments less painfully into your budget. 

Mortgage holders should be aware that future rate rises (and therefore increased mortgage repayments) are definite possibilities.  However the simple act of planning can go a long way to lessen the financial impact on your family.  

Posted by Charles Tarbey on 15/11/2010 at 11:37 AM | Categories: Finance - State of the Market -

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