The Australian Open might be over, but today, the RBA stepped up to the court and smashed a rate hike down the line. Sorry mortgage owners, the cash rate has officially increased to 3.85%.

Since the end of last year, many signs were leading to this turning point - despite some economists trying to stay optimistic.

However, the latest inflation data delivered the final blow. All four major banks, CBA, NAB, ANZ, and Westpac placed their bets on a 0.25% rate hike following the grim announcement.

But it’s not all bad news! Economists are still hoping this is a one-off insurance hike and not the start of a hiking cycle. 😬

Why were economists expecting a rate hike?

Since mid last year, Australia’s inflation has been steadily climbing despite the RBA’s warnings and best efforts to keep it under control.

In the latest announcement, December’s CPI rose to 3.8% and the RBA’s preferred metric, trimmed mean inflation, also jumped to 3.3%... outside the RBA’s target of 2-3%.

This basically means that people are spending more, and prices of goods and services are increasing faster than expected.

In particular, people are spending more on housing (+5.5%), food and non-alcoholic beverages (+3.4%) and recreation and culture (+4.4%).  

Why is that a bad thing?

The RBA is concerned because when prices rise too quickly, households lose purchasing power (same pay check = affording less stuff), and this leads to a ✨cost of living crisis✨. As prices get higher and higher, the inequality gap widens and lower income families get hit the hardest.  

So the big four banks expected the RBA to bump up the cash rate and reign inflation back in. But there are always domino effects following a rate hike - it puts pressure on household spending, which in theory puts a lid on inflation.

The relationship between Australia’s inflation rate, cash rate and unemployment rate gets messier than a love island love triangle. But if you want to learn more about inflation we’ve covered it in more detail here.

For now, here’s what you should focus on:  

What happens when the cash rate goes up?

If you’ve got a variable-rate home loan, this could add a few hundred bucks a month onto your repayments… which means less to spend on other essentials.😔

Savers, good news for you! You might see interest on your accounts go up. It’s worth shopping around or parking cash in high interest saver accounts for maximum gains!