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High interest rates are not bad news for everyone. Just ask savers, importers and Australians heading overseas

  • Written by Isaac Gross, Lecturer in Economics, Monash University
High interest rates are not bad news for everyone. Just ask savers, importers and Australians heading overseas

It is a universally acknowledged truth that interest-rate rises are always a bad thing for the average Australian household.

They are just a punitive form of economic medicine we have to take from time to time, on the say-so of the Reserve Bank of Australia - but nobody enjoys it. Except perhaps the sadistic central bankers.

And this is probably true for anybody with a mortgage. That might describe the majority of economic commentators, but it is not true of all Australians.

While higher interest rates are bad for borrowers, and therefore good for savers, there are in fact many ways higher interest rates directly help (a subset of) Australian households.

Higher cash rates means lower house prices

One of the most direct effects of the higher cash rate is its impact on households’ ability to finance the purchase of a new house. Whether you are a first home buyer, a repeat buyer or an investor, a higher interest rate will limit what you can borrow and therefore the amount you’re able to pay.

Accordingly, a higher cash rate leads to lower house prices. This is great news for young Australians yet to buy their first home.

People standing outside a house about to be auctioned
Higher interest rates limit what you can borrow and therefore what you can pay for a property. AAP[1]

Buying into the property market is especially hard in Australia these days, and lower housing prices is great news for these households who have up until now been locked out of owning a home.

A higher cash rate means they will pay more on their mortgage if they are successful. But the Reserve Bank’s calculations suggest that in the medium term home buyers are better off when higher rates lower house prices.

The higher the rate, the healthier the returns

Whether you are saving to buy a car, a house or just for retirement, a higher interest rate will mean you get more bang for your buck on your deposits at the bank. For anyone who has yet to take on a mortgage or has already paid theirs off, higher interest rates mean they will be better placed to build their savings.

Analysis of HILDA data[2] by the Reserve Bank suggests these net-savers are less likely to own a home, less likely to be employed, and consume far less than their debt-ridden cousins.

While there is a lot of heterogeneity in the broad category of “savers”, we should welcome the extra income to young households who haven’t yet been fortunate enough to be burdened with a million-dollar mortgage.

While a lot of Australians invest their savings in the stock market either directly or indirectly via their superannuation funds, many retirees transfer their assets to less volatile forms of savings such as term deposits or cash savings. A higher interest rate greatly increases the return that retirees and pensioners receive on both these sources of savings.

Rate rises haven’t received nearly as much press as the increase in mortgage rates, but interest rates for savings accounts have also risen over the past year.

Higher interest rates are great for travellers

Whenever the Reserve Bank increases the cash rate, the dollar is directly affected. A higher interest rate means a stronger Australian dollar[3]. This is a boon to anybody who wants to travel overseas.

People with their suitcases in a queue at an airport
Australians travelling overseas benefit from a stronger dollar caused by higher interest rates. AAP[4]

The stronger Australian dollar means that whether you are buying a pint of beer in London or a piña colada in Puerto Rico, it will be cheaper for you to spend your money overseas, and your holidays will be more affordable as a result.

The combination of a strong Australian dollar and a weak pound means there has never been a better time to visit the United Kingdom and enjoy some warm beer and mushy peas!

High interest rates are great for anyone who drives

Just as a stronger Australian dollar makes overseas travel cheaper, it also keeps the price of imports down. And Australia imports a lot of important goods.

Our biggest single import is cars. Australia imports all its cars, ever since the demise of the local car manufacturing industry. The second biggest import is refined petroleum. Given that cars, and the fuel that runs them, is a non-discretionary good for most households, keeping their price low is important for most consumers.

Higher interest rates help do exactly that, keeping our dollar strong and the price of new cars and petrol down.

But what about my mortgage?

This is not to say that the conventional wisdom - that higher rates are a net negative for the modal household - is wrong. Obviously anyone who is paying off a mortgage debt of hundreds of thousands of dollars is going to be financially disadvantaged by higher interest rates.

Read more: How the Bank of England's interest rate hikes are filtering through to your finances[5]

But it’s important to keep in mind that not all Australian households are net-borrowers, and that there is nothing inherently evil about higher interest rates.

There are many reasons why a higher interest rate is a good outcome, far better than a world in which rates are trapped at 0 per cent forever. High interest rates may not be here forever. We should enjoy them while we can.

References

  1. ^ AAP (photos.aap.com.au)
  2. ^ Analysis of HILDA data (www.rba.gov.au)
  3. ^ stronger Australian dollar (www.rba.gov.au)
  4. ^ AAP (photos.aap.com.au)
  5. ^ How the Bank of England's interest rate hikes are filtering through to your finances (theconversation.com)

Authors: Isaac Gross, Lecturer in Economics, Monash University

Read more https://theconversation.com/high-interest-rates-are-not-bad-news-for-everyone-just-ask-savers-importers-and-australians-heading-overseas-210466

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