Who Sets Interest Rates?
The federal bank in any given nation controls all financial matters in the economy. The Australian federal bank is known as the Reserve Bank of Australia, and it controls
official interest rate levels, also known as the cash rate.
The interest rates that Australians pay for financial services such as home loans and personal loans are to some extent determined by the official cash rate set by the Reserve Bank. The Reserve Bank sets official interest rate levels at 0.25 percentage point increments which will in turn shape the economy and financial markets.
What Affects the Interest Rate?
While the federal banks determine official interest rates, they do so in accordance with the current economic climate so as to circumvent inflation. If the federal bank anticipates high future inflation because of increased wages from a constrained workforce, which could inhibit profits and borrowing capacity, then interest rates will increase. Doing so will lower the likelihood of inflation by stimulating the economy and increasing borrowing capacity.
What is the Current Interest Rate?
The Reserve Bank announced a 0.25% decrease in official interest rates to 3.0% in April 2009, the lowest in 50 years. However, the bigger banks have refused to bring the full benefit of the latest interest rate cut to their borrowers, despite pressure from the Prime Minister and consumer groups.
The Commonwealth Bank, ANZ and Westpac have all made a mere 0.1% decrease to their mortgage rates, while the National Australia Bank has made no change at all. Most other mortgage lenders have been quick to follow the lead of the big banks, leaving home buyers and mortgage holders unable to enjoy the full benefit of the Reserve Bank’s April rate cut.
Since September 2008, the Reserve Bank has made five consecutive rate cuts and some economist speculate that further rate cuts could be a possibility, though this will depending on the shape of the economy and the effect of the current cash rate.
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