Australia interest rates: Barefoot Investor says he ‘LOVES’ higher interest rates – here’s why

Australia’s famed Barefoot Investor has shared his surprising support for high interest rates, despite the country’s ongoing cost of living.

The Reserve Bank of Australia has set the current spot interest rate at 2.6 percent – the highest since 2013 – causing Aussies to make higher repayments on their mortgages each month.

Scott Pape, once voted ‘Australia’s most trusted financial expert’, revealed in his latest newsletter that he welcomes the rate hikes because it encourages responsible spending.

“A word of warning: what I’m about to say will trigger a lot of people. I actually welcome higher interest rates,” he wrote.

“That puts me at odds with pretty much every other financial commentator…but I don’t care. There is much positive to a higher interest rate.’

Pape believes that rising cash rates are pushing Australians into healthier savings habits and “discouraging people from speculating about stupid things”.

“They bring down house prices and give first-time homebuyers a solid chance to get in. And they help retirees earn a few crumbs without risking all their money in the stock market,” he said in the October newsletter.

Banks have been raising interest rates on savings accounts throughout the year to encourage more people to store their money – and Mr Pape says they offer a good opportunity to earn.

“You can now earn as much as 4.45 percent by keeping your money on a two-year term deposit with mainstream financial institutions, known as authorized depository institutions (ADIs),” the Barefoot Investor said.

“Still, I wouldn’t rush to lock up my money at this point. That’s because our old friends, the humble online savings accounts, are a lot less groggy now.

“Some online savers pay as much as 3.6 percent without having to lock up your money…which gives you the option to switch if there’s a higher deal elsewhere.”

Pape believes rising cash rates are pushing Australians into healthier savings habits and ‘discouraging people from speculating about stupid things’

Pape urged readers to speak to his team if people feel they’ve borrowed too much against their homes, but said the 0.25 percent increases shouldn’t be a problem for the majority of the country.

ANZ predicts that the spot rate will peak at 3.6 percent next May, while Westpac says the spot rate will peak at 3.6 percent in March.

Under that rate, Aussies with a $500,000 loan would pay between $760 and $982 more per month than at the start of 2022.

A borrower with a $1 million loan would see their payments rise between $1,520 and $1,964.

The Treasury’s economic forecasts released before the budget show inflation peaking at 7.75 percent – unchanged from previous forecasts – but lasting longer due to high energy prices and the latest wave of flooding.

The Reserve Bank of Australia has set the current spot rate at 2.6 percent – the highest since 2013 – causing Aussies to spend more money on their mortgages each month

In July, the federal government expected GDP to grow by two percent next fiscal year, with the budget to reveal the department’s most current growth forecasts.

Likewise, the IMF predicts that the economy will grow by 3.8 percent this year and the growth rate will halve to 1.9 percent the following year.

And rising interest rates are yet to put a big dent in the record-low unemployment rate, which held steady at 3.5 percent in September, despite fewer-than-expected new jobs being added to the economy.

But rising interest rates and the accompanying global downturn are expected to take a toll on the labor market, with the Treasury’s budget forecast for the unemployment rate revised upwards from July estimates to a peak of 4.5 percent next fiscal year.

The department previously expected the unemployment rate to peak at 4.25 percent.

Promising news for workers is that the tight labor market is starting to push wages up, with a wage price index of 2.6 percent for the June quarter.

However, wages are still well below inflation.