Will soaring fixed rate hikes bring pain for borrowers?

Australia’s March quarter inflation data was released recently, and it doesn’t provide an optimistic sight for Australians for the upcoming months. The inflation rate has exceeded market expectations for the first quarter of 2022. Due to a high increase in the consumer price index (CPI), the Reserve Bank of Australia (RBA) might bring changes in the monetary policy. 

20-year high inflation in Australia

According to the data released by the Australian Bureau of Statistics (ABS), Australia’s CPI increased by 2.1% in the March 2022 quarter and 5.1% annually, surpassing all market expectations. Amid the skyrocketing prices, significant interest rate changes on loans, especially fixed interest loans, may hurt borrowers. This is a shocking surprise to the borrowers who were significantly dependent on fixed interest rate loans amid the pandemic.

MUST-READ: Three takeaways from Australia’s March 2022 quarter inflation data

 Soaring interest rates

Boom of fixed interest rate loans during Covid-19

Australia observed a boom in demand for fixed-rate mortgage loans following the cheap funding for banks provided by the Central Bank. According to data released by the Australian Bureau of Statistics, by mid-2021, fixed interest rate loans accounted for 46 per cent of new loans. This was a significant change because fixed interest rate loans accounted for only 15% before the pandemic.

However, as the country experiences high inflationary pressures, the soaring fixed rate hikes may cause further economic pressure for Aussies. 

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TITLE: How High Will Australia’s Inflation Rate Go? | Breaking News Australia

 

Soaring fixed interest rates

National Australia Bank recently raised its fixed interest rate on the mortgage loans for the fourth time this year. On the other hand, Westpac increased most of its fixed rates twice in one week in mid-April. Other banks are also raising their fixed interest rates while keeping the variable interest rates down, pushing the borrowers to shift to the latter loans.

 

According to ABS data, following the interest rate hikes, fixed interest rate loans only accounted for 28% of new loans in February, the lowest since April 2020. Additionally, as interest rates keep soaring, fixed interest rate loans are expected to go down in the upcoming months.

 

FINAL READ: Why IMF expects the Australian economy to grow at 4.2% in 2022

 

Currently, most banks are keeping the variable interest rate competitive. However, with the upcoming tightening of monetary policy by the RBA, the variable rates may also rise. Several analysts have commented that the rise in fixed interest rates signals the forthcoming changes in the national monetary policy.

 

 

 

 

 

 

 

 




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