3 benefits of a higher cash rate according to The Barefoot Investor
The RBA has increased the cash rate again, but it's not all bad news. Rising rates do have a few benefits, particularly for younger Australians.
The Reserve Bank of Australia (RBA) has increased the official cash rate for the seventh month in a row in November, up to 2.85%. It's doing this because inflation is at its highest level in 32 years. Increasing the cash rate is the number 1 way to bring inflation back down.
With a higher cash rate comes higher home loan rates, which is bad news for people with a mortgage. However, Scott Pape, author of the well-known finance guide The Barefoot Investor, said rising rates do have some benefits.
"I'm actually cheering on higher interest rates. There's a lot to like about higher interest rates," he said in his weekly newsletter.
Higher rates help people save money
Just like how mortgage rates have gone up, interest rates offered on term deposits and savings accounts have risen a lot this year.
"Now it's true for the past few years that rates on savings accounts have just totally sucked. However, over the past few months the banks have really been stepping up their game," said Pape.
This time last year, you'd be lucky to find a savings account that offered much more than 1.5% p.a. interest, which isn't much help if you're trying to save for a house deposit.
Now there are many accounts paying 4% p.a. or more on your cash, which is a great benefit for people trying to save.
Higher rates help bring down house prices
During 2020 and 2021, we had record-low interest rates. It became much easier for people to access loans and enter the property market. We saw house prices surge as a result of increased demand.
With rising interest rates, the opposite is true. "They bring down house prices and give first home buyers a fighting chance to get in," said Pape.
As more people struggle to afford their mortgage, more houses become available on the market, freeing up supply and causing house prices to drop as a result.
Economists are predicting house prices to fall by as much as 20% by the end of next year.
Higher rates cool down the share market
With ultra-low interest rates, investors are more likely to pour money into the stock market in search of any kind of return.
It's also a bigger incentive to invest in riskier stocks when your cash in the bank isn't earning any interest.
Similar to the housing market, in 2020 and 2021 we saw the stock market surge and prices for shares became very expensive.
However, rising interest rates have slowed this down. "They discourage people speculating on dumb things," said Pape.
This could be good news for younger Australians who want to enter the stock market and start to build up a portfolio at a more reasonable price point.