One question we are being asked more frequently is: 'Why is the Reserve Bank of Australia (RBA) increasing interest rates? When are they going to go back down?'
Taming Inflation: The Primary Reason for Rising Rates
The RBA’s primary goal in raising interest rates is to control inflation. Inflation refers to the rising cost of goods and services over time, which erodes the purchasing power of your money. How does this affect you? For your lunch today, let’s say you bought a sandwich for $10. Due to inflation, let’s say prices go up 2% next year. This means that your favourite lunchtime sandwich might cost $10.20 next year. Your $10 still has value, but it won’t get you as much as it used to. That’s inflation eroding your purchasing power – your money buys a little bit less over time.
By increasing interest rates, the RBA is trying to slow down consumer spending and borrowing. Which often reduces the demand for goods and services, eventually leading to price moderation and bringing inflation back down.
Why Maintaining Economic Stability Matters
The RBA’s interest rate adjustments play a very important role in maintaining our economic stability. Here’s how:
- Controlling Inflation: A stable inflation rate, as targeted by the RBA, ensures the value of your money remains relatively constant, protecting your purchasing power and the value of your savings.
- Sustaining Economic Growth: Uncontrolled economic growth can lead to a boom-and-bust cycle, ultimately causing recessions such as the global financial crisis in the late 2000s. The RBA’s actions help prevent the economy from overheating, promoting sustainable long-term growth.
- Supporting Employment: Stable inflation and economic growth create a favourable environment for businesses to thrive, which leads to more jobs and a stable job market.
- Maintaining Confidence: Predictable and stable economic conditions mean confidence among consumers and investors. This confidence is crucial for sustained economic activity and investment, driving overall financial well-being.
The Takeaway
While rising interest rates may have short-term (and for many of us stressful) implications, it’s important to understand the RBA’s bigger picture. By raising rates, they aim to manage inflation and maintain a healthy, stable economy. In the long run, this benefits all of us.
While rising interest rates may have short-term (and for many of us stressful) implications, it’s important to understand the RBA’s bigger picture. By raising rates, they aim to manage inflation and maintain a healthy, stable economy. In the long run, this benefits all of us.
Concerned About Rising Rates? We Can Help!
Whilst this explains why rates are rising, it doesn’t take away the stress and the financial pressures currently being experienced by many Australians as a result.
At Green Associates, we can help you work through the impact of rising interest rates on your finances. Our financial advisors can guide you on managing your investments, loans, and savings strategies in this evolving economic climate.
