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Why it would be good if the RBA raised rates

Why it would be good if the RBA raised rates

The Reserve Bank hasn’t raised interest rates since 2010, so it will be terrible when it eventually happens, right? Well, no.

Since November 2010, when the Reserve Bank increased the official cash rate to 4.75 per cent, it has gradually fallen to a record-low 1.50 per cent.

As a result, banks are currently offering some of the cheapest home loan rates in Australia’s history. For example, Reduce Home Loans is offering mortgages from as low as 3.39 per cent (comparison rate 3.39 per cent), while Homestar Finance has mortgages starting at 3.44 per cent (comparison rate 3.45 per cent).

If you have a mortgage, you probably want those extraordinarily low rates to continue forever. But here are five reasons why it would be good if the RBA lifted the cash rate:

1. Our debt binge would end

Australia’s household debt-to-income ratio is now at a record 199.7, which is alarmingly high. Part of the reason is that people have been gorging on cheap debt – the ratio was at 163.2 back in 2010, when the Reserve Bank last raised rates.

Once interest rates rise, people are likely to stop taking on new debt and start repaying old debt, which means that household balance sheets will improve.

2. Risky borrowers would be saved from themselves

In the past few years, a false belief has taken hold in some quarters that interest rates will always be low and property prices will always increase. As a result, some people are taking out mortgages that they probably can’t afford, which could result in misery down the line if they fall behind on their repayments and the bank takes their home.

In March this year, APRA, the banking regulator, instructed the banks to make it harder for these marginal borrowers to qualify for home loans. Rising rates will have a similar effect, thereby protecting some borrowers from themselves.

3. Life would become easier for first home buyers

Rising interest rates will lead to reduced demand from property buyers. That could result in price drops in the absurdly expensive Sydney market and the merely expensive Melbourne market. That, in turn, would make life easier for first home buyers in those cities.

4. It would prove the economy was improving

The reason interest rates are so low in Australia – and around the world – is because many countries are still trying to recover from the Global Financial Crisis, which erupted in 2008.

By increasing the cash rate, the Reserve Bank will be signalling that the Australian economy is improving and life is returning to normal.

5. The next crisis would be easier to handle

The Reserve Bank responded to the GFC by slashing the cash rate – it fell from 7.25 per cent in September 2008 to 3.00 per cent in April 2009, which helped Australia avoid recession. But if another crisis occurred today, the Reserve Bank would have almost no room to move given that the cash rate is currently at a record-low 1.50 per cent.

The higher the Reserve Bank is able to life the cash rate during the good times, the more room it will have to cut during the bad times.

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