Reasons why fixed rates are increasing

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You’ve no doubt noticed that interest rates and fixed interest rates, in particular, are on the rise. This development is causing some concern and confusion in the housing market. The Reserve Bank has been steadfast in its declarations that interest rates won’t change until 2023, so what on earth is going on?

It is true that the Reserve Bank has control over official interest rates, but it does not control the interest rate market. Banks and other financial intermediaries set their interest rates in accordance with various market parameters. These parameters include such variables as market expectations, cost of funds, demand and supply of money, and overseas factors. The moves in fixed rates can be attributed to all of these factors to varying degrees.

  • While the RBA has continued to forecast no interest rate movements for the next twelve months, the interest rate market simply does not believe those forecasts. Most analysts and forecasters expect that rising inflation will force the RBA’s hand in the second half of this year.
  • Fixed rates are set by banks in relation to what they expect their cost of funds to be over a period of time. When fixed rates start to move upward, the banks are “betting” that variable interest rates and official cash rates will rise in the future.
  • There are emerging signs that inflation is becoming a major issue for Central Banks worldwide. The USA already has an inflation rate of 7%, The Bank of London has raised its official cash rates in response to inflationary pressures. Australia’s inflation rate is now approaching 3% which s the highest that it has been for some time.

All of these factors have contributed to the rise of fixed-rate home loans. If recent developments have caused you concern or you would like to know how best to adapt to the changing market conditions, now is the time to arrange a consultation with our consultant. Give us a call today to arrange a mutually convenient time.

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