Want lower interest rates? Don’t have a bet this Cup Day

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As the nation anticipates the race that stops a nation on Cup Day this Tuesday, another event of significant consequence looms: the Reserve Bank of Australia’s potential cash rate increase, fortuitously scheduled for the same day.

These – seemingly unrelated – events present us with a critical financial crossroads with billions of dollars at stake. A Tuesday rate hike will have far-reaching implications, so it is imperative for us all to cut back on discretionary spending, especially during the Melbourne Cup Carnival.

It may be the race that stops a nation, but discretionary spending is a significant driver of inflation.Credit: Fairfax

The probability of an RBA rate increase this week has surged from a mere 20 per cent to an even-money bet recently, and it wouldn’t surprise me at all to hear they’re increasing it again – especially after a few months of holds.

To add to this, the International Monetary Fund (IMF) has weighed in, recommending further rate hikes to bring inflation under control. While the final decision rests squarely with the RBA, the IMF’s input carries considerable weight and could bolster the case for a rate hike.

Throughout 2022 and the early months of 2023, interest rates in Australia witnessed a notable (and painful) increase as the RBA grappled with mounting inflation. If the RBA proceeds with another rate hike, it could push the cash rate to 4.35 per cent, rendering mortgages even more expensive for millions of families across Australia. This move, from my perspective, will have a profound impact on households, especially considering the already substantial 70 per cent increase in mortgage costs experienced.

Inflation remains something we’re all worried about, with the latest figures indicating a 5.4 per cent inflation rate in the September quarter, well above the RBA’s target range of 2-3 per cent. The IMF’s recommendation to raise rates is rooted in the need to bring inflation back within this target range by 2025 and maintain inflation expectations.

Discretionary spending (like betting and attending events like the Melbourne Cup), will continue to be a significant contributor to inflation.

Moreover, the IMF has tried to drive home that the responsibility for combating inflation does not rest solely on the RBA’s shoulders – something I’ve been preaching for the last year. There’s so much more to the story than the RBA just increasing our cash rate to combat the issue: the IMF has called upon federal and state governments to implement public investment projects at a measured pace to alleviate inflationary pressures, and I agree it’s time they stepped up more.

Simultaneously, while the RBA deliberates its next move, the Melbourne Cup Carnival continues to solidify its position as Australia’s largest economic generator among annual sporting events.

In 2022, the carnival contributed a staggering $422.1 million in gross economic benefit to the state of Victoria. A study by market research company IER revealed that over the past decade, the Melbourne Cup Carnival has injected more than $3.6 billion into Victoria’s economy, surpassing the Australian Open by nearly $1 billion.

The carnival’s impact extends beyond direct spending, with $2781 in gross economic impact per attendee in 2022, a 10 per cent increase from 2019. Notably, the event attracted 38.3 per cent out-of-state visitors, demonstrating its national and international draw. The Melbourne Cup Carnival also plays a vital role in supporting charities and creating jobs, contributing more than $1 million to various charitable causes and supporting 16,194 jobs.

But as we celebrate the Cup, it’s important we have a conversation about how our personal discretionary spending drives inflation, therefore driving higher interest rates.

Australians, on average, spend nearly $180 each on Melbourne Cup Day, which often includes betting and lavish celebrations. This is, to me, a terrifying figure given CommBank research found that one in three Australians say they couldn’t come up with $500 in an emergency if they needed to.

With the ongoing cost-of-living crunch and interest rate hikes, households are treading on thin ice when it comes to their finances. Discretionary spending, encompassing non-essential purchases and leisure activities (like betting and attending events like the Melbourne Cup), has been and will continue to be a significant contributor to inflation.

While we’re all a little uneasy about the current state of our economy, it’s important for us all to be aware and consider cutting back on discretionary spending. While the cup may be a cherished tradition, it is crucial to prioritise your personal financial stability.

So while you’re looking at which horse to back this year, please also consider the following reasons why I think you should think carefully about your spending:

• Rising mortgage costs: with interest rates on the rise, mortgage costs are becoming a substantial burden for home owners. Redirecting discretionary spending towards paying down debts or building financial reserves could be a wise move.
• Inflation control: The RBA’s primary goal is to maintain price stability and control inflation. By reducing discretionary spending, you can contribute to curbing inflationary pressures.
• Economic uncertainty: The IMF’s recommendation for further rate hikes underscores the uncertainty in the economic landscape. Taking a more hands-on approach to our own personal finances can help us plan against any unforeseen challenges.
• Long-term financial health: It’ll come as no surprise that prioritising saving and responsible spending today will lead to you having greater financial security and more opportunities and choice in the future.

As the Cup Day/rate rise double feature approaches, we all face a big decision. Yes, the carnival is undoubtedly a significant cultural and economic event, but it is so important we cut back on discretionary spending and put ourselves in a comfortable position, even if it means skipping out on a few fun things in the short term.

The IMF’s endorsement of the RBA increasing the cash rate again highlights the urgency of addressing inflation, so it’s time we stepped up to play our part by embracing responsible financial decisions on a personal level. By doing so, everyone can secure their financial well-being and contribute to the broader economic stability of the nation.

As we celebrate the “race that stops the nation”, let us also remember the importance of smart money decisions. Navigating this intersection of celebration and economic responsibility requires foresight and discipline, ensuring a prosperous future for individuals and the nation alike.

Victoria Devine is an award-winning retired financial adviser, best-selling author, and host of Australia’s number one finance podcast, She’s on the Money. Victoria is also the founder and co-director of Zella Money.

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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