What are interest rates and who are they determined by?
Every country has a federal bank. For instance, in America, it’s the Federal Reserve and in Australia, it’s the Reserve Bank of Australia (RBA). They determine financial matters in a country, such as
interest rate levels.
Interest rates control how much borrowers will need to repay after taking out a loan from banks. Basically, it’s what you pay for obtaining money that doesn’t belong to you. Federal banks determine target overnight rates at increments of 0.25 percentage points which will then affect the market and the economy.
Why do interest rates go up and down?
The chief reason why
interest rates go up or down is so the country doesn’t go down the road of inflation. Economic activity, or inactivity, will mostly depend on interest rates determined by the federal bank. If high future inflation is anticipated because of things like increased wages from a constrained workforce, which stunts profits and borrowing capabilities, the federal bank will raise interest rates to encourage public spending and borrowing capacity, thereby reducing the possibility of inflation.
How is the everyday person affected by interest rates?
The most common ways that the everyday consumer is affected by interest rates are mortgage affordability, credit cards and loans.
With low interest rates in Australia, especially in the current economic downturn, borrowers can decrease their monthly mortgage repayments or maintain them to pay off their mortgage sooner. This is specifically advantageous for those with a variable rate home loan, which fluctuates according to the interest rate set by the Reserve Bank. Variable rate home loans are the most popular type of home loans taken out by Australians, so interest rate drops or rises are an integral part in home affordability.
Interest rate changes can also influence those with fixed rate home loans. For instance, say you applied for a fixed rate loan at 5.5 per cent and interest rates then increased six times at 0.25 percentage points. When your fixed rate home loan finishes, you could be faced with a 1.5 percentage point increase to your interest rate, taking it to 7 per cent per annum.
Naturally, interest rates are vital for the economy. In the present economic situation, reducing interest rates supports borrowers with credit cards, home loans and personal loans, which in turn generates public spending and borrowing capacity and boosts the economy. Even slight changes to interest rates can effortlessly shape public spending, employments rates and even the world economy.
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