RBA warning: Time to save for a ‘rainy day’

The RBA boss dropped a few clues about the future direction of interest rates and real estate markets when he spoke at a Canberra breakfast event on Tuesday to launch ASIC’s National Financial Capability Strategy.

“All of us have to make choices about money every day,” Mr Lowe said. “Do I spend, or save? If I spend, what do I buy and how do I pay for it? If I save, where should I invest; how much risk should I take? If I borrow, how much should I borrow and how quickly should I pay it back?”

The Reserve Bank governor gave some wise words of pragmatism when he suggested that “we all need to plan” how we manage our money.

“If we go in the wrong direction, it can have a major effect on our families and our welfare, perhaps for years. So it is really important we make well-informed financial decisions,” he warned.

Mr Lowe said that, for many Australians, their biggest single financial decision is whether or not to borrow to buy a home. After noting that he is not allowed to give financial advice, Mr Lowe did stress a few important issues.

“The first is that interest rates go up and down,” he said. “It is nearly eight years since the previous increase in interest rates by the RBA. This means that many borrowers have never experienced a rise in official interest rates. They have mostly experienced lower rates.

“At some point this will change. Over recent times, the Australian economy has been improving. My advice here is to make sure your finances can withstand a lift in interest rates.”

The second point was that housing prices don't always go up; like interest rates, they go up and down, Mr Lowe warned.

“We are seeing an example of this in Sydney and Melbourne at the moment. And most of our cities have seen falls in housing prices at some point over the past decade,” he said.

“While I would expect housing prices to trend higher over time as our incomes increase, there is no guarantee that your home will be worth more tomorrow than it is today. So plan accordingly.”

Mr Lowe urged Australians to make sure they build “adequate financial buffers” into their plans.

“Things don't always turn out as we expect,” he said.

“So for most of us, having a buffer against the unexpected makes a lot of sense. We all need to prepare for that rainy day. It rarely makes sense to take all the credit that you are offered, whether on a credit card or when you apply for a loan.

“Many Australians with mortgages find the best way of building buffers is to put any spare money into their offset account. This makes a lot of sense.”

Finally, the RBA governor said Australians should shop around and not be shy to ask for a better deal.

“There are very good deals out there if you look. We can all play a role in making our markets more competitive by being smart and informed in our choices,” he concluded.