Official interest rates have risen 25 basis points, which will flow through to mortgages, credit cards and business loans, after the Reserve Bank board judged that inflation pressures in the economy were too high, thanks to constrained capacity, a pick-up in inflationary expectations and the war in the Middle east. However, it was far from a unanimous decision. Four of the nine voting members called for no change in interest rates. In fact, RBA Governor Michele Bullock said the board discussed a “hawkish hold”, meaning not lifting interest rates but saying they might in the future. In the end, the risk of inflation outweighed the risks of hurting the jobs market, she said.

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News in brief

Higher interest rates should put the brakes on spending, but so too will higher petrol prices. Citi estimates that for every 10¢ increase in average fuel prices consumers would be hit with a $1.6 billion direct annual cost and the total cost could be $6-7 billion. That would be a bigger impact than a 25 basis point rise in rates.

Australia is inching towards a free-trade deal with the European Union, with reports suggesting it is close to being finalised. European Commission President Ursula von der Leyan expected to travel to Canberra next week.

The federal government has released a review of Australia’s R&D sector, headed by Tesla chair Robyn Denholm. The headline finding is pretty damning — Australia's R&D investment has dropped to 1.69 per cent of GDP, well below global leaders.

The largest ever review of medical cannabis trials found no evidence that it was effective in treating anxiety, depression or post-traumatic stress disorder, notwithstanding an explosion in the number of prescriptions being written for those conditions.

Sri Lanka has declared every Wednesday a public holiday to conserve fuel as the island nation grapples with possible shortages in the wake of the US and Israel's war with Iran.

Fear-o-meter

Between May 2022 and December 2023, the cash rate jumped from 0.1 per cent to 4.35 per cent, or 425 basis points. The interest rate paid by mortgage borrowers increased by around 320 basis points. In other words, borrowers did not feel the full impact of higher interest rates.

Were the banks being nice to customers? Not really.

According to a Reserve Bank discussion paper, there were two key reasons why the full impact of the higher cash rate did not hit people with a home loan. The first is that so many people had locked into low rate, fixed term loans. Variable rates might have risen, but fixed rates remained fixed.

The second reason was the effects of heightened mortgage lending competition. The more lenders competing for your mortgage, the better outcome for customers.

The discussion paper said that most of the increase in lending costs had been passed through by the end of December 2024.

The moral of the story is that while official interest rates are rising, and borrowers can’t do much about that, they can work harder looking for better deals.  That is the best way to minimise the impact of higher interest rates.

Fear & Greed Q+A today

On the RBA's interest rate hike, including the impact the Middle East conflict had on the decision:

 

“The war in the Middle East is putting all central banks in a difficult position at the moment. What central banks are really worried about is that inflation expectations are going to increase too much, and that high oil prices will seep through into all other parts of the consumption basket. That’s what they’re really concerned about.

 

They probably have some PTSD as well after the 70s experience with oil prices, maybe some of them. And of course during COVID we had these very high increases to inflation, which initially were due to supply reasons, and that seeped through into so many different parts of consumption. I think that’s causing them to be a little bit more concerned about inflation than perhaps they would have been if we had another supply shock.”

Greed-o-meter

Further to yesterday's story about where Gen Zs are getting their financial advice - take a look at the main sources of guidance for Australians aged 18-28. With YouTube rating more highly than financial advisers, it's no wonder ASIC is a little worried.

Source: ASIC, reported in Australian Financial Review

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