Why is the RBA still lifting interest rates in 2023?

If you’re wondering what’s driving interest rate rises, here’s a quick rundown.

With more than a dozen rate hikes since May last year, you may be wondering, why have increases been so consistent after years of record-low rates?

Here’s what you need to know, including how movements in interest rates could affect you.

Why have interest rates been going up?

Interest rates have increased to try to reduce inflation, which is an increase in the price of goods and services. You may’ve noticed the heftier price tags attached to fuel, food and electricity lately.

The assumption is higher interest rates (in other words, making it more costly to borrow money) will reduce consumer spending, and bring down price rises (inflation) as a result.

Why is inflation high at the moment?

Inflation started to rise after the covid pandemic. There was pent-up demand for goods and services as people emerged from the pandemic – and when demand is greater than supply, shortages and price increases generally follow.

Another key event that impacted supplies worldwide was western countries placing sanctions and trade restrictions on Russia in response to the country’s invasion of Ukraine.

This halted imports of Russian oil, gas, farming, food and various other goods, which contributed to a rise in energy prices globally, with local businesses increasing their prices too, as a result. 

There are now predictions price hikes on fuel and other things may result on the back of instability in the Middle East, so whether this further drives up inflation (and interest rates as a result) is a real possibility.

What role does the Reserve Bank of Australia (RBA) play?

The RBA is Australia’s independent central bank and responsible for overall financial system stability.

Part of its role is determining the official cash rate, which represents the interest banks and lenders have to pay on the money they borrow. This influences economic activity and inflation.

Banks and lenders don’t have to follow suit and change interest rates when the RBA changes the cash rate, but they tend to do so, with increases and decreases generally flowing through to borrowers.

How do rate rises impact you?

If you’ve got a variable-rate home loan, you’re more than likely aware higher interest rates mean higher repayments, and that’ll also apply to numerous fixed-rate home loans that rollover to higher variable rate loans this year. But what do rising interest rates mean for your super and investments?

Super savers and retirement pension holders

If your super is invested across several investment types, such as shares, property, fixed interest and cash, an interest rate rise could make your super balance go up or down, depending on how it’s invested.

For retirees, higher interest rates could be a good thing. This is because as people approach retirement they may move to lower-risk investments (such as fixed interest and cash) and have less exposure to higher-risk assets like shares and property.

Other investors

Share markets react to interest rate movements, but instability tends to be short lived. If the economy remains strong and company earnings can grow, shares historically perform fairly well.

Direct property and property securities are generally impacted as higher rates reduce borrowing capacity. Higher interest rates may also slow down the property market by reducing demand.

Meanwhile, returns are generally favourable for those invested in more conservative assets like fixed interest and term deposits.

Things to keep in mind

While a number of industry experts have signalled further rate rises are likely, some have indicated the number of rate rises may stabilise.

The pace and extent of interest rate rises will come down to economic conditions, which are still fairly unpredictable at this point in time.

While you may want to review your investments and ensure your portfolio is well-diversified and age appropriate, it’s important not to be reactive and do your research before making any decisions.

History shows those who stick with their strategy are generally rewarded.

If you’re after some advice, speak to your adviser or use our find an adviser service to locate someone near you.