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The Reserve Bank of Australia is a government business entity that also operates as a central bank. It was formed in 1960 and is responsible for the nation's monetary policy and payment system.

The RBA's interest rate decisions have an influence on the value of the Australian dollar. If the RBA increases interest rates, this will usually lead to a fall in the currency. However, if the RBA lowers interest rates, this will usually see the value of the Australian dollar rise. This is because interest rates in Australia are generally higher than overseas.

After 11 years since November 2010, the RBA propelled the official cash rate by 25 points to 0.35 per cent from 0.1 per cent, on the 3rd of May 2022. While this is a financially devastating blow to homeowners, the shocking move was made by the RBA to put a cap on the country's steadily rising inflation. 

With the annual rate skyrocketing to 5.1 per cent, the inflation continues to put the economy in a tumultuous turn as prices everywhere shoot up faster than any rates ever recorded in two decades. 

What Does the Higher Cash Rates Mean for Homeowners and Mortgages?

Robust economic growth and low unemployment have underpinned an increase in wages and inflation rates in Australia. The RBA has been cognizant of this for a while now and has always sent out notices of rising rates.

First-time homebuyers will have to dig deeper into their pockets to get their hands on a home and current owners can expect to receive less on their selling price. Even though the RBA's decision to increase by 0.25 percentage points may not seem like much, it could be extreme for those with a $300,000 loan over a 30-year period.

The RBA is hiking its benchmark interest rate for the first time in a decade, a move that could lift the cost of mortgages and come at a delicate time for the economy.

The Bottom Line: How Does a Further Lift in Interest Rates Help Combat Inflation in the Long Run?

With the recent events turning the world upside down—from the COVID-19 pandemic, the war in Ukraine, and the recent floods—it's not a shock to see inflation surge in Australia. While it's still lower than the 8.5 per cent in the US and the 7 per cent in Europe, the UK, Canada, and New Zealand, Australia's 5.1 per cent still means trouble. 

The RBA has raised rates to slow the growth in house prices and household debt. This is a problem that has been simmering for years in Australia but has continued to escalate over the past 12 months as Sydney and Melbourne's markets continue to make price gains in the double digits.

The big problem that the RBA has been facing is people borrowing more money to buy a house. Sydney and Melbourne's properties are overvalued and their prices are unlikely to rise forever. So, the only way to fix the problem is to get ahead of it and take a proactive approach.

The RBA has the perfect opportunity to fix the issue before it becomes a problem. If they can nip it in the bud now, the RBA can keep interest rates low for a longer period of time.

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