Reserve Bank of Australia

Young Australian’s Top Stories This Week (July 10)

The Top Stories This Week From A Young Australian’s Perspective.      1. The Reserve Bank of Australia raised the cash rate to 1.35%. What does this mean for young Australians? Just four weeks after announcing a cash rate increase of 50 basis points (0.5%), the RBA has announced another cash rate increase by the same amount. The cash rate now sits at 1.35% Similar to the cash rate increase from a month ago, a higher cash means a higher interest rate. And a higher interest rate is good for savers, but bad for borrowers. Not sure how increasing interest affects borrowers and savers? Click here to read our explanation from the previous cash rate hike. So if you have a mortgage or personal loan, this means that you’ll be paying more interest to your banks. Which means less discretionary spending for you. But if you have a high-interest savings account, then the bank will pay you more for having your money in the savings account. Read how interest rates and inflation go hand in hand here.        2. House prices continues to fall What does this mean for young Australians? House prices have been falling since April and it doesn’t look like it’s stopping soon. Last month, Sydney recorded a 1.6% drop in home prices, the largest since 1989. For young Australians, this is probably music to your ears! With house prices finally coming down, the dream of owning your home might actually be possible in the years to come. But with potentially more cash rate increases still to come, house prices might fall even further. Many economists expect that by the time the housing market reaches its lowest point, house prices will have fallen by more than 15%.

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Reserve Bank of Australia raised the official cash rate to 0.85%

How Interest Rates and Inflation Go Hand In Hand

Inflation in Australia has hit a sky high 5.1%, the highest it has been since 2008. The price of fuel, electricity, and even lettuce has all gone up by more than 50% in the past year. To counter the rising inflation, the Reserve Bank of Australia (RBA) has raised the official cash rate in consecutive months, the first time this has happened since May 2010. The cash rate is now at 0.85%, up from 0.1% just over six weeks ago. And more interest rate rises are still to come. It’s all part of the RBA’s plan to keep Australia’s inflation between its target of 2 to 3 percent. But how does this work? How does increasing the cash rate reduce inflation? Increasing Interest Rates Reduce Demand The Reserve Bank of Australia is responsible for setting the cash rate, which is the interest rate that banks use for overnight loans to each other. The cash rate helps determine the interest rate at which money is lent or borrowed by consumers and businesses. So when the RBA increases the cash rate, it raises the cost of borrowing for banks. And naturally, the banks pass on the higher cost of borrowing to consumers and businesses. This means that when the RBA raised its cash rate by 0.5% last week, consumers and businesses will have to pay more to borrow money. *However, it’s important to note that a 0.5% increase in the cash rate doesn’t mean that the interest rate quoted by the banks will also increase by 0.5%. This higher cost of borrowing will reduce the demand of products and services and reduce the overall economic activity. For example, if your weekly mortgage repayments go up, you have less money (discretionary income) to spend on other goods. For businesses, a higher loan repayment might mean that the business will be less likely to invest in new equipment or hire additional workers. This reduced demand for goods and services is exactly what slows down the rate of inflation. Basic economics says that the prices of goods and services increase when there is greater demand (law of demand). But when it costs more to borrow money, the overall demand for goods and services decrease. Whilst prices might not necessarily decline, the rate of inflation usually does. Real Life Example To better understand how the two are linked, let’s consider a typical household with two loans: a home loan and a car loan. Inflation has been sky high during the pandemic, and thus the price of everything has gone up. If the interest rate on your loans goes up, then you would need to spend more of your disposable income on those repayments. As your repayments on the loans increase, the household has less discretionary income to spend in other areas, such as going to the cinema. From the cinema’s perspective, there’s a drop in demand as most movie-goers can no longer afford that luxury. The cinema’s revenue decreases. If you’re a cinema owner, you might decide to reduce the price of the ticket in order to entice some of the movie- goers back. But because you decided to drop the prices, your profit margins decrease. The tighter profit margin means that you can no longer afford to hire all the staff, so you decide to lay some people off. As a result, less people have jobs. Thus less people will have the money to go to the cinemas, further reducing the demand for your goods. Now imagine it’s not just one cinema, or one business, but the entire country’s economy. Even small increases in cash rates can have ripple effects that significantly slows down the country’s economic activity. Thus, companies would no longer be able to raise prices. Thus, by increasing the cash rate, the Reserve Bank of Australia has reduced the ability of companies to raise prices for goods and services, thereby slowing inflation.

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The Top Stories This Week From A Young Australian’s Perspective

The Top Stories This Week From A Young Australian’s Perspective. (6/12)      1. The Reserve Bank of Australia raised the cash rate to 0.85%.  What does this mean for young Australians? A higher cash means a higher interest rate. And a higher interest rate is good for savers, but bad for borrowers.  Think of interest as the fee the borrower pays to the lender for borrowing their money. If you’re a borrower and the interest rate goes up, then your interest repayments (or ‘fees’) goes up. But if you’re a lender and the interest rate goes up, then you get a larger ‘fee’. So if you have a mortgage or personal loan, this means that you’ll be paying more interest to your banks. Which means less discretionary spending for you. But if you have a high-interest savings account, then the bank will pay you more for having your money in the savings account. The Reserve Bank of Australia raised the cash rate in order to lower inflation. Read how interest rates and inflation are linked here.        2. Reliable Coal-Fired Power Plants Not So Reliable. What does this mean for young Australians? On Wednesday, AGL turned off a unit at its Bayswater power station for repairs. Then on Thursday, another unit at the coal-fired facility went offline due to breakdowns.  There’s already an energy crisis in the eastern states, and this is only making the problem worse. The deteriorating breakdowns at one of the country’s biggest electricity generators is sending electricity prices soaring through the roof, and also raising the prices for coal’s main alternative: gas. This is putting a lot of pressure on households to stay warm and businesses to operate during the colder months.  It’s going to be a long, cold, and very, very expensive winter. Here are some tips to reduce your power bill this winter.         3. Price Of Lettuce Skyrocketed To $12 What does this mean for young Australians? It means that you’ll probably no longer be eating lettuce anytime soon! Seriously, $12 per head of lettuce?!?!?!? And it’s probably not the only vegetable on the rise in recent months, with capsicum, spinach, and onion all increasing in price as well. The reason for the significant increase in price is due to the lack of supply. The devastating floods in Queensland earlier this year wiped out around 80% of lettuce crops, creating the lettuce shortage we have now. The major growing region for lettuce this time of the year is in the Gatton region in Brisbane, which was affected by floods in both February and May.  If you still want salad but can’t afford to pay $12, try replacing the recipe with cabbage. After all, that’s what KFC is doing.  

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