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Why does the RBA keep hiking interest rates?

This is why the Reserve Bank of Australia keeps hiking interest rates.

Video transcript

- Why does the Reserve Bank of Australia keep hiking interest rates? The RBA currently estimates the neutral rate to be somewhere around 2.5% to 3.5%, down from over 5% before the GFC. So while the rapid rate rises we've seen this year seem daunting, the central bank is actually trying to bring inflation down and the interest rate back up to its neutral point.

When the cash rate is very low, borrowing money is cheaper, so there's more cash to go around. But when something like a global pandemic hits and disrupt supply chains, the prices start going up because the demand for things is high, but there is a lack of supply. If everybody is flush with cheap cash, they'll keep paying more and more for those items, making inflation go through the roof.

To avoid this, the RBA lifts the cash rate, making it more expensive to borrow money, essentially dampening economic activity. This reduces demand. So prices eventually go back down. So while the cash rate increases can cause some pain, they're implemented to help the economy, and in turn, you.

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