I’m sure you’re all aware that the RBA increased the cash rate by 0.25% earlier in the week, and as expected all the banks have pretty much decided to pass the increase on to borrowers.
For those with existing mortgages, those increases won’t happen for a few weeks yet.
I’m frustrated by some of the levers that the RBA uses to justify increases, the extent to which consumers have any meaningful impact on those levers, and the role government stimulus packages end up doing more harm than good.
So in this week’s newsletter, I provide some of my thoughts about the actions of the RBA. For many years pre-COVID, the RBA seemed to be doing a stellar job – because there wasn’t much they had to do. The real test has come post-COVID when the pressure has been on, and I don’t think I’m alone in thinking they haven’t past the pub test.
Over the past year, a lot of borrowers have been asking the same question: did the RBA really need to push rates up that far?
It’s a fair question, and the short answer is that the Reserve Bank of Australia got spooked.
On paper, inflation looked scary. Headline numbers were running hot, wages were ticking up, and globally, central banks were in full panic mode after COVID stimulus, supply chain chaos and energy shocks. No one wanted to be the central bank that “fell behind the curve”.
So the RBA reacted aggressively.
The problem? A big chunk of Australia’s inflation wasn’t being driven by everyday spending or runaway wages. It was driven by one-off supply issues – housing shortages, construction costs, insurance premiums, fuel volatility and government-linked pricing. These aren’t things higher interest rates fix very well.
But rate rises do hit households quickly.
Australia has one of the highest proportions of variable-rate mortgages in the world. That means rate increases flow straight through to family budgets – fast. Within months, discretionary spending slowed, mortgage stress climbed, and consumer confidence dropped sharply.
In hindsight, it’s clear the RBA was trying to send a message: “We’re serious about inflation.” The risk of doing too little felt bigger than the risk of doing too much.
Unfortunately, that caution came at a cost.
Many economists now agree that rate hikes likely overshot what was needed, especially given how quickly inflation began easing once supply pressures settled. Even the RBA itself has acknowledged that forecasting during this period was exceptionally difficult.
For borrowers, this reinforces one thing we tell clients all the time: structure, buffers and the right loan strategy matter more than ever, especially when policy decisions don’t always land perfectly.
Variable
The rates below are based on a $500,000 loan, with the borrower making principle and interest payments with a loan term of 30 years. The rates quoted may vary depending on the borrowers LVR.
1 Year Fixed
The rates below are based on a $500,000 loan, with the borrower making principle and interest payments with a loan term of 30 years. The rates quoted may vary depending on the borrowers LVR. At the end of the three year fixed period, the borrowers interest rate will revert to a standard variable rate for the life of the loan.
