Why the interest in the Australian interest rate?

January 06, 2014
Mark Hevron

On the first Tuesday of every month (except January) the Board of the Reserve Bank of Australia meet. One of their topics of discussion is the national monetary policy which includes setting the federal cash rate. This is often referred to as the Australian interest rate or the official cash rate (OCR) .  The Reserve Bank sets the target 'cash rate', which is the market interest rate on overnight funds. It uses this as the instrument for monetary policy, and influences the cash rate through its financial market operations. Economists take great delight in "crystal ball gazing" each month, endeavouring to predict whether this rate will rise, fall or stay the same. Newspapers hold headlines until the decision "to move or not to move" is made public by the Board.

 

So why the interest in the interest rate?

The RBA’s most important task is to set the monetary policy for Australia. The aim of this policy is to achieve low and stable inflation in the medium term.Setting the Australian interest rate assists in this task. This rate, currently 2.5%, is what banks pay when they borrow from another bank overnight. Any alteration in this rate often will lead to a change in the interest rate for not only mortgages and other loans but also savings deposits. This in turn effects the lives in one way or another, whether they realise it or not, of many if not all adult Australians.

 

Surely that is a big call? All adult Australians effected by a change in the interest rate?

I understand your sceptism. You own your own home or you rent. You don't have a mortgage. You may be one of the few people to not own a credit card. You earn too little to have "savings". How then does a change in the national interest rate effect you?

You shop. You purchase. You pay for services. Somewhere in that chain of events an individual or a business will have borrowings. The interest on those borrowings is an expense incurred in providing those goods or services. Any change in the interest rate of those borrowings, especially upwards will ultimately have to be passed on to you, the Consumer. Should interest rates fall and stay low, it is possible that this decrease may also be passed on, although less likely.

 

So the interest in the Australian interest rate is real?

It most certainly is. It is not "media hype" or "political beat up". A change in the Australian interest rate is of significance to everyone. Consider your own personal circumstances and weigh up how any change will effect you. Follow this Blog for further discussions on interest rate movements.

 

References: www.global-rates.com; www.macrobusiness.com.au; www.rba.gov.au

 

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Posted in: Interest rates

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