Interest rate rise may come faster than you expect, so be prepared

A piece of fresh financial data has left me shocked and stunned.

It wasn’t last week’s lower-than-expected inflation figures, soaring used car prices or record iron ore shipments.

It was the revelation that the numbers of Australians receiving unemployment benefits dropped by more than 90,000 during April – despite the JobKeeper wage subsidy program getting switched off on March 28.

After dire predictions of 100,000-plus Aussies joining jobless queues, the end of JobKeeper was thankfully a non-event. Unemployment is falling fast and new jobs are being created rapidly despite some COVID-hit sectors still struggling.

It clearly illustrates just how well our economy is doing, and why there’s a chance interest rates will climb sooner than many people think.

Reserve Bank governor Philip Lowe and his board are set to keep interest rates on hold on Tuesday. Photo: Sam Mooy/Getty Images

The Reserve Bank’s monthly meeting on Tuesday won’t reveal a rate rise, and there won’t be one for a while yet after more subdued inflation data last week, but the speed of economic recovery suggests the RBA’s forecast of no rise until at least 2024 is at least a little shaky.

This means borrowers, home buyers and business owners need to start factoring future rate rises into their financial calculations.

Longer term rates are already going up. Westpac and subsidiaries BankSA, Bank of Melbourne and St George last week lifted their four and five-year fixed rates by 0.3 per cent, following a similar move by the Commonwealth Bank.

Car loan interest rates and commercial lending rates have climbed too, and financiers say that’s a signal for people to pay attention.

Future tax cuts will put more cash in Aussies’ pockets and potentially fuel higher consumer spending, higher inflation and higher interest rates.

The RBA’s official cash rate currently sits at just 0.15 per cent, down from 4.75 per cent a decade ago.

The cash rate has traditionally been used as a lever to control economic growth by keeping inflation in a desired 2-3 per cent target band.

In theory, raising rates should slow spending and inflation, while cutting rates should boost spending and inflation – but that theory’s been shot down in flames.

Small future rate rises will have a big impact on borrowers.

Inflation has been below 2 per cent for most of the past seven years and the RBA has resorted to quantitative easing – or printing money – to try to get inflation above its current level of 1.1 per cent.

But thinking rates will always be this low is dangerous to your wealth.

Borrowers have huge mortgages compared to the early 2000, which means small rate rises will have big impacts on many households. Here’s what you can do.

• Try to repay an extra 1 per cent on top of your mortgage repayments now, so you’ll be able to absorb rate rises when they arrive.

• Pay off as much as you can quickly because it dramatically reduces interest and provides breathing space in any future emergency.

• Compare rates online to make sure you’re on the best possible deal. If not, haggle with your lender, threaten to switch, and be prepared to walk.

• If you’re an investor battling ultra-low rates on cash deposits, consider diversifying your assets into some higher income options such as quality shares, but only if you can tolerate the risk.