Banks and Interest Rates

Changes to interest rates creates a ripple effect through our financial system, affecting each of us in different ways.

What does a rise in interest rates mean?

A rise in the cash price may be good news for Australians banks and businesses, but for many of us, a rise in interest rates might mean an increase in repayments for mortgages and other loans. Many Australians could find borrowing money harder and personal finances more expensive. This doesn’t bode well at a time of decreased spending.

The official cash rate is generally the lowest interest rate at which banks borrow from other banks. A rise in interest rates means that it is more expensive for banks to borrow money —leading to banks increasing their rates to keep up.

The Reserve Bank (off the back of the GFC) have kept the official cash rate on hold at record lows for the past 21 months, due to the slow growth in Australia’s economy. The decision to lift to global interest rates from the Federal Reserve and the European Central Bank could

influence the RBA’s decision to lift — but we don’t know when to expect it.

While it is unclear how soon the RBA will lift interest rates, it may be that the banks won’t wait for a decision. If US interest rates exceed the Australian rate, the ripple effect will contribute to the decreasing value of the dollar.

Such a trigger does not mean it will all be downhill from here: an eventual fall in the Aussie dollar is likely to mean that our exports — such as iron ore and crude oil — will become cheaper overseas, offering a boon to investors and businesses alike.

Understanding the relationship between interest rates and the banks can help you to better prepare for when interest rate changes may affect your investments. It can also enable you to make better financial decisions in the future.

At Money Morning, you can learn how to defend your financial assets against the system and discover the potential ways to make money in the current financial climate.

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