The RBA just raised rates. It affects more than just your home loan

On Tuesday, the Reserve Bank of Australia (RBA) increased the cash rate to 4.6 percent, marking the fourth time this year they have raised the rate. This decision aims to bring inflation under control, but the impact of a higher official interest rate extends far beyond mortgage repayments.

The cash rate, set by the RBA, represents the official interest rate on unsecured overnight loans between banks. It signifies how costly it is for banks to borrow from each other. When the cash rate increases, it becomes more expensive for lenders to borrow money. Consequently, banks will likely charge customers higher interest rates to maintain their profit margins, as they are now paying more to borrow funds.

Belinda Allen, the head of Australian economics at Commonwealth Bank, explains that the RBA has lost patience with inflation remaining above target levels for most of the past six years. Higher interest rates make borrowing more expensive and saving more attractive. This shift in consumer behavior tends to slow household spending and business investment, reducing demand pressures in the economy and eventually helping to bring inflation back towards the RBA's target range of 2–3 percent.

While most analysts surveyed by Bloomberg anticipate the RBA will halt hikes for the remainder of the year, ANZ, HSBC, and UBS are the only major banks predicting a November rate increase. The ANZ economist, like Dr. Oliver, expects the economy to show signs of cooling, such as falling home prices, a softer jobs market, and rising recession risks by the time of the November meeting. Consequently, a second or even third rate hike may not be necessary.

The RBA's next cash rate decision is scheduled for Tuesday, November 3.