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Does interest rate hike have its repercussions?

Team Veye | 25 Jul 2022

Does interest rate hike have its repercussions?

History says that Energy and Financials are the sectors that reap maximum benefit from rising interest rates as banks and other lenders raise rates on borrowers. The real estate and discretionary consumer sectors are the ones that lose out the maximum at such times.

When RBA lifted its key cash rate to 1.35% marking a 125 basis points hike since May and the fastest series of moves since 1994, Australia's "big four" banks quickly reacted by raising their home loan variable interest rates by 50 basis points (bps) per annum, passing on the central bank's third consecutive rate hike in full to their customers.

Whereas many countries resort to recessionary measures, like an increase in rates to bring inflation down, RBA has done the balancing act, lifting the rates but still endorsing cautionary economic growth and keeping unemployment low.

The unemployment rate in Australia is at a record low of 3.50 percent in June of 2022, averaging 6.73 percent from 1978 until 2022, reaching an all time high of 11.20 percent in December of 1992. 

The RBA has been facing some criticism for delaying the interest rate hike. It does not hold the view that there will be substantial financial stability risks arising from the household sector, risks were a little high, though. The unemployment rate suggests that currently, people have jobs to service their mortgages, the way the risks play out will be influenced by the future path of employment growth.

Recently, RBA started withdrawing the monetary policy stimulus that was activated to support the Australian economy against the effects of the pandemic. Further withdrawal though depends on many factors, how households respond to the combination of rising interest rates and prices could be one of the major considerations

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