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Bad medicine: Why the RBA is right to increase rates  background image

Bad medicine: Why the RBA is right to increase rates

Bad medicine: Why the RBA is right to increase rates  icon

In February the Reserve Bank of Australia (RBA) increased official interest rates again, this time another 25 basis points. The official interest rates are now 3.35% pa, up from 0.1% pa in May last year, an increase that is sure to be causing mortgage stress and rental increases amongst the most vulnerable. 

But, as bad as high interest rates are, they are better than the alternative; high long-term inflation.  That’s why the RBA is right to keep increasing interest rates.

Inflation is the increase in pricing levels of goods and services over time. It is important that inflation is in control, and price increases sustainable. Governments can control inflation through fiscal policy, and central banks via monetary policy.  

The RBA has a target inflation rate of between 2% and 3% per annum.  In the December quarter, Australia’s inflation rate increased to the highest it’s been in three decades; 8% a year.

The problem with high inflation

Rising interest rates cause pain for people with a mortgage; about one-third of adult Australians.  But high inflation is bad for everyone in the community, particularly the vulnerable and those who are retired.

Because inflation causes the reduction in purchasing power of savings, it reduces the standard of living in the community.  But worse than that, high inflation causes uncertainty, which destabilises markets, which in turn leads to a reduction in investment and economic output.  Compounding this, rising domestic prices make our exports more expensive relative to other countries, making them less competitive in the international markets.

A stitch in time

The December inflation figure of 8% pa surprised most economists and the RBA, although the causes are well-known.  Global supply chain problems stemming from Covid shutdowns; the energy crisis in Europe, and now the pent-up demand as economies reopen, have caused high inflation in several economies worldwide.

But now the RBA is in a race against time.  It is important that the December figures are perceived as temporary, an aberration.  If they are perceived as a new normal, then it will be a self-fulfilling prophecy. With employees demanding higher wages and businesses hiking up prices prematurely, high inflation can become embedded.

Inflation and your retirement

At When Financial Solutions, we are independent retirement planners.  We understand that inflation is the number one risk in retirement, and that retirees are both long-term and short-term investors.

We also understand that volatility, while a normal part of investing, should be actively managed. As independent retirement planners, we are free to choose investments that are fit-for-purpose for retirees.   

And we will give you the confidence you need to spend today, knowing you are being responsible for the future. It’s not a matter of ‘if’ but ‘when’.


This article is general and does not consider your personal circumstances so it may not be appropriate to you.  If you would like independent advice specific to you, please give us a call.





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