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Falling Aussie dollar could lead to interest rate hike

The Reserve Bank of Australia will be sitting for its monthly meeting tomorrow and the question on everyone’s mind is whether interest rates are finally going to change after a record long period of holding steady.

While most believe that the official cash rate will remain on hold for August at least, there is a warning from a Moody’s Investors Services report that a rise is imminent.

The report said that ongoing falls in the Australian dollar could put pressure on the Reserve Bank to lift interest rates to combat price inflation.

The Australian dollar has fallen 5 per cent against the US dollar this year, from a high of above 81 cents in January to a current low of around 74 cents.

“Sustained currency depreciation is credit negative for Australia because it could bring forward a tightening of the country’s monetary policy, making debt less affordable for highly leveraged households,” Moody’s analysts wrote.

It was also noted in the report that Australian debt is at an all-time high, having risen from 180% three years ago to 200% in March this year.

Any increase in the cash rate is always a concern, however some lenders have already lifted their rates independently of the Reserve Bank.

The Big Four have kept their rates steady, with the Commonwealth Bank even lowering some of their home loan products recently, but a move by the Reserve Bank could see them follow suit with others.

Protect yourself against higher rates

Those concerned about the possibility of higher rates should take steps to prepare themselves now.

  • Pay down debt – The best thing you can do is pay down as much debt as you can as quickly as you can to create a financial buffer.
  • Find a lower rate – It is also worth shopping around to find a lower home loan rate so you are paying less in the first place.
  • Talk to your lender – You could also try calling up your current lender to see if they can improve your current offering.

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