Australia is facing a supply chain ‘existential crisis’ according to the Financial Review. In fact, we are currently dealing with the worst threat to our supply chains since World War II. For most everyday Australians, we see that in the cost of products, in longer delivery times and in more out-of-stock items than we’re used to.

This really comes as no surprise. But what we are surprised by is how supply chain disruption also causes rising home loan interest rates.

What do global supply chain disruptions have to do with your home loan interest rate?

When it comes to understanding the effect of supply chain disruptions on your home loan interest rates, there’s really one word we need to focus on:

Inflation.

What is inflation?

The definition of inflation is quite simple.

Inflation: an increase in prices that leads to the lowered purchasing power of money generally.

In other words, because prices are rising, your money buys less.

In practice, inflation is simply caused by people spending more. When there are more jobs, higher incomes and more cashed-up consumers, then people engage in more discretionary spending. With more spending comes more overall demand. And when there’s more demand then those producing the goods can charge more for those items.

In the alternative, you might have a situation where there’s simply not enough goods to buy. In that situation, demand outstrips supply, so prices spike. The result is, again, that your money buys less.

Let’s look at these more closely.

Example 1—More money

There’s a corner shop owner in a regional town. Imagine a new mine opens in the town, and there’s a huge influx of consumers. These shoppers have lots of money from their jobs at the mine. So, they come to the corner shop and start buying goods. The owner needs to start bringing in more supplies meet that demand and to keep those consumers happy. So, to slow down their buying, he starts to raise prices. After all, the demand is there, and that means the goods are more valuable.

These rising prices mean that those consumers can buy less with the same amount of money leading to inflation.

Example 2 – More demand

In this case, we have the same corner shop owner. But instead of a mine opening, there’s been a serious drought, and fresh produce is proving more and more difficult to come by. Demand rises sharply. So, the shop owner starts to charge more for the produce that he does get to slow down the demand from his customers. So consumers now have less buying power – in other words, inflation.

Causes of inflation in Australia

Today we are seeing a huge rise in inflation in Australia. In the third quarter 2022, the annual inflation rate rose to 7.3%, which is above marketing forecasts of an already huge 7.0%. This is caused by a combination of events. First, many Australians became ‘cashed up’ during the COVID-19 pandemic, as a result of not being able to spend money on overseas holidays and during lockdowns.

Second, the war in the Ukraine, and staffing issues from ongoing pandemic impacts, has meant that many products and transportation lines have been heavily impacted in Europe as well as domestically. Things are harder to get. And that means that they have become more expensive.

Third, Australia is still experiencing high consumer demand. We want more things right now. And the more money we spend in the economy, the more we are contributing to inflation.

The impacts of inflation

The impacts of inflation go beyond just being able to buy less. They also impact our home loans. And that’s because the RBA uses cash rate hikes to control consumer spending and lower inflation.

Why does this work? Well, when we have less money to spend, demand goes down. When demand goes down our purchasing power goes up (we can buy more for less), and that stops inflation.

This is the tactic that the (RBA) is using at the moment, having hiked interest rates this year, with more perhaps in the future. In its final cash rate announcement for 2022, we saw the RBA spike the cash rate to a whopping 3.1%. And with every cash rate hike we see Australian banks and lenders passing through those percentage points to our own home loans.

Supply chain disruptions => higher demand => inflation => higher interest rates

This is not an intuitive thought process, but global supply chain disruptions are part of what has led to higher interest rates on your home loans. And while inflation continues to grow, or doesn’t drop to the band that the RBA finds acceptable, then it will continue to hike rates to establish a more sustainable balance between supply and demand.

Get home loan support today!

The good news is that our team is here to help you manage rising interest rates. In fact, there’s never been a better time to refinance. And we can help you find the best interest rate for your next home loan.

Get in touch with our expert team and get a free personal home loan assessment today!