US rate hike: How Australians can prepare if RBA follows suit

Highlights 

• Australians are now expecting a rate hike anytime soon after the US Fed raised rates on Wednesday.
• The US Fed announced a 0.25% hike in its benchmark short-term interest rate.
• Rate hikes lead to higher loan rates for many consumers and businesses.

Despite the Reserve Bank of Australia’s (RBA) attempts to quell jitters regarding a potential rate hike, Australians are bracing for the same after the US Federal Reserve raised rates on Wednesday. The US Fed announced a 0.25% hike in its benchmark short-term interest rate, delivering first rate hike in more than three years.

Rate hikes lead to higher loan rates for many consumers and businesses. Fed officials also forecast four additional hikes in 2023, lifting benchmark rate to 2.8%, the highest level since March 2008.  The Federal Reserve also expects that the rate hike will achieve its objective of taming high inflation.

Meanwhile, last week, RBA Governor Philip Lowe said that it was likely that the Australian central bank might start raising rates in 2022, even as inflation pressures were less acute compared to US.

In case, the RBA decides for an interest rate hike in its next monetary policy meeting, borrowers should be ready in advance. Here we discuss five personal finance tips which can help you get ready for the upcoming interest rate hikes:

Make sure your portfolio is sufficiently diversified

The first and foremost tip is to ensure that your investment portfolio is sufficiently diversified amid expectations of a rate hike. A high-rate environment can lead to consumers having less cash in hand, which negatively impacts revenues and profits of companies. This eventually results in lower earnings and share prices. Hence, one should go for stocks which can withstand the impact of rate change.

Evaluate your mortgage arrangements

An interest rate hike can have an impact on your mortgage arrangements. In case of a variable rate mortgage, borrowing rates rise in line with the central bank’s base rate. However, new interest rates don’t apply on the fixed-rate mortgage until the end of your fixed period

Clear your outstanding debt

It is better to clear your outstanding debt while the interest rates are low. A surge in interest rate can significantly impact individuals with sizeable debt, when the lending rate is variable. It is always advised to clear your most expensive borrowing as early as possible.

Think long term

You should always hold a long-term view when you invest your money, especially in stocks. Investors with long-term view are able to better balance the highs and lows, while benefitting from the long-term potential that comes with this approach.

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