RBA has been tightening monetary policy for a while now. But the credit card providers are jacking up interest rates at a faster pace. Here are the implications for an average cardholder.
The Reserve Bank of Australia (RBA) sets the official interest rate, known as the cash rate, according to how the economy is performing at the time. In its monthly meetings, the RBA considers the inflation rate and such key economic indicators such as unemployment, the consumer price index (CPI), producer price index (PPI) and retail sales. After analysing this information, the board determines whether the existing rate should be held steady or changed.
This is the most fundamental reason for the existence of central banks, controlling inflation while allowing the economy to grow unhindered. The use of interest rates to control money supply is known as monetary policy. Another way of steering the economy is through fiscal policy e.g., under recessionary pressure most countries will try and ramp up government spending, thus injecting more money into the circulation. The idea with both the methods is for a smoother economic experience.<
The recent rate hikes were prompted by fear of a housing market crash, which is quite likely given the increasingly upward moving trend of housing prices. To pre-empt such a turn of events RBA increased the base rate by 0.25% last April, and again in May by a further 0.25%. Usually any increase in this rate is matched by increases all across the range of debt related products, but this time credit card issuers have outdone themselves by raising credit card interest rates beyond the base rate growth.
For every rate hike of the amount of 0.25% most credit card providers – including but not limited to Citibank, Aussie, Macquarie, Westpac, NAB, and Suncorp – have increased their credit card interest rates by 0.5%, and in some cases by as much as 0.6% higher than previous rates. Most notable increases were applicable to cash advance rates, while some rate hikes also applied to regular purchase rates. In addition to these increases in credit card interest rates the interest free periods on some balance transfer deals have been reduced.<
It seems the credit card issuers want to use these opportunities to make some profit for themselves, even outpacing RBA in their rate hikes. If you’re looking for a new card now is definitely not a good time to go shopping for one. But for those who have no choice you can still find some good deals in the market, particularly a few balance transfer offers which are offering 0% interest for up to 6 months. You just have to look a little harder.
