The Melbourne Cup Rate Rise – Why Did it Happen, What Does it Mean for YOU?

This time WHY matters.

The 3-year bond rate in the US is 5.30%, the 10-year bond rate 4.65%.

The 3-year bond rate in Aust is 4.35%, the 10-year bond rate is 4.75%.

Banks BORROW to lend to you at the 3-year bond rate (among many other sources) – so money is COSTING the banks 4.35%

They can also borrow (overnight) from the Reserve Bank at the cash rate 4.10% – but the Reserve Bank also needs to borrow that to lend to the banks – so the Reserve Bank is making LOSSES at 4.10%.

Money markets meant the Reserve Bank HAD to move to 4.35%.

That is technical – but behind the technicality are some dominant factors – primarily inflation running at 5%.

1. YOU cannot have 5% wage increases without inflation being 5% – think about it. There is no magic pudding – so wage increases of 5% led to this rate rise.

2. Governments (and Australia included) are out borrowing IMMENSE amounts of money to convert electricity systems away from fossil fuels. The infrastructure is incredibly expensive. There is no magic pudding here either – anyone politician that says the transition to renewable is cheaper is either naively stupid or duplicitous – take your pick.

This week – you might have already heard the Treasurer talking about cutting back in infrastructure spending – (he knows the govt has a role to play in this rate rise).

What happens next and what do you do?

The cash rate now matches the markets – so it should be the last – but with my reasons 1 and 2 – there is no absolute answer here.

I have said for some time that you needed to be planning for a 6% home loan rate and for many it will now be 6.2%.

It is annoying, it will not be easy – but for now:

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  For you the thing to do is take a deep breath, find places to save the extra that is needed and ride it out for the time being.

• For me, I will continue to ensure that you are always receiving either, new to bank rates. (or as close as I can get) Even though you don’t like the rates most of my clients are currently UNDER new to bank rates in the market. I will continue to play this role for you fastidiously.

As always here anytime on call txt or email – It’s what I’m here for.

Ask Alan – A Mortgage Broker looking after your best interests.