The Reserve Bank has raised interest rates for the 9th consecutive meeting.
The Reserve Bank has once again raised interest rates as expected.
The Reserve Bank is treading a precarious path...
…as rising interest rates cause further financial stress.
The most aggressive interest rate tightening cycle since the early 1990s recession.
If you're blessed with the gift of consciousness then you'll know it's been impossible lately
to avoid hearing about things like rising interest rates, and inflation, and recession,
and the Reserve Bank. But why do we care about all this? Are we facing a recession?
And what even is the Reserve Bank? When it comes to everything Aussie money
the Reserve Bank of Australia, or RBA, is ground zero. Its main job is to monitor and look after
our economy. You might also hear it be called the "Central Bank" since it's the centre of all
monetary movements. Pretty much every country has their own version that essentially makes
the rules that all the mainstream banks, like in Australia's case, NAB, Westpac, Commonwealth Bank,
ANZ, and so on, follow. The whole Reserve Bank shebang is owned by the Australian Government,
but they don't actually run it. Instead, the Treasurer, who's this guy, Jim Chalmers,
appoints a separate group, or board of people to run it for them. The board is led by someone
called the Governor; this guy, Philip Lowe, and he along with his band of 8 other merry
money-minded people meet eleven times each year to make tough decisions about a bunch of things
like how much money should be printed, how to keep people employed, and most importantly right now,
what the cash rate should be, which affects how high interest rates are.
There's a bit of RBA jargon in there and at this point you might be feeling an unbelievably low 0%
interest in this story! But there are good reasons why you should be interested. So,
let's break down some of those terms starting with, well, interest.
Let's say you want to buy something really expensive like a house, or a car, or the giant
koala, located in Dadswell Bridge, Victoria, for whatever reason. Most people don't have that kind
of money just lying around so, they have to get a loan from a bank. The banks are like, "Yeah, sure,
you can have the money! But, as well as paying back what you've borrowed, you have to pay us
a percentage on top. You know, a little extra. A bonus. For our troubles". And that is interest.
Interest also works in reverse. For example, if I deposit money into a savings account the bank
will pay me interest, because banks can use the cash that I’ve deposited to loan to somebody else,
effectively, borrowing it from me. Interest rates rise and fall all the time,
but what causes that? Well, that's where the cash rate comes in.
The cash rate is basically a fancy name for the percentage of interest that banks have to pay on
the money they borrow from other banks. Yeah, fun fact, banks sometimes lend money to each other.
That's because each bank needs to have a certain amount of cash on hand
at all times to pay out anybody who wants to make a withdrawal.
The RBA controls the cash rate and if the cash rate rises, like it has done recently,
then banks will usually pass the full rate rises to their customers to make more profit.
Now's probably a good time to answer why the RBA raises the cash rate in the first place.
Basically, it's to curb inflation. Yeah, another piece of financial jargon.
Inflation happens when too many people are spending too much money, which causes the
price of everything to go up, and causes the value of the dollar to drop. Not ideal.
During COVID, people weren't going out and spending money. So,
when restrictions finally lifted in early 2022, people had a bunch of extra money to
go and spend which pushed the price of everything up and dropped the value of the dollar, blah blah
blah. But supply issues from the pandemic also contributed to inflation. For example,
semi-conductor chips, which are used in things like game consoles and cars,
were in short supply which meant things like new consoles and cars couldn't be built, and
the value of second-hand items went through the roof, and so the RBA started raising the rates.
Since May last year, the cash rate has been raised nine times from
0.1% to 3.35%. It still sounds like quite a low number but in reality,
it means a lot more financial stress for many households around the country.
Some of them are saying that "Sashi I cannot have a healthy meal because
healthy meal costs lot of money, I have to pay my mortgage first.
It also means people renting are having to pay more too because their landlords are having to
pay more interest. It's absolutely
completely overwhelming and stressful looking at the rental market.
You're looking at something like a million households, that's about
10% of Australian households, having to cut back their spending significantly.
And the rate rises aren't over. It's noisy but raising interest rates is
always unpopular. I don't think we're at the peak yet, how far we have to go up, I don't know.
A lot of people are angry at the RBA and Philip Lowe, and some people are
worried that the rising interest rates are pushing us towards a recession.
You seem prepared to smash Australia into a recession.
Can I assure you that's not our intention. We are trying to navigate a narrow path here. The
fact that it's all sheeted down to me is a bit unfair but, because it's the board,
there are nine of us, including Michelle. In a world where we've been in, where inflations
been quite low and stable, people didn't worry about it. What we want to go back to
is a world where it's just in the background. A recession is basically when everything in
the economy goes backwards. It can happen when people aren't spending enough money on goods and
services, causing businesses to cut production and people to lose their jobs. No fun.
We recognise it's really difficult if you've got a mortgage and the interest rate's gone up as well,
I mean people are really, really hurting, I understand that, but I also understand that if
we don't get on top of inflation, it means even higher interest rates and more unemployment.
As much as people point all the blame at the RBA, this whole kerfuffle isn't just
because of them. It's also the banks. Those guys pretty much have free reign to set their interest
rates at whatever they like, usually to maximise profits, which is what they have done recently,
and they have been making BANK. Pardon the pun. The biggest earner is the Commonwealth
Bank who've made a cool 5.15 billion dollars in profit in just half a year.
They're very fast to pass on interest rate rises but they're
very slow to pass on interest rate cuts. They’re like greedy moths to the flame,
eating away at your savings. They should be absolutely ashamed of themselves.
Now it's just a waiting game to see how high rates rise, but the government is
working on ways to ease the pain. We are working around the clock to
provide that responsible cost of living relief in an affordable way, without adding to inflation.
We'll find out more about the government's plan when they release their budget in May. But,
for the time being we’re probably going to hold off buying that giant koala.