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.

Australian Banks

The GFC threw a lot of banks around the world into turmoil, but in Australia the banks escaped relatively unscathed. That’s due to Australia’s comparative…

Reserve Bank of Australia

Here, you’ll find the latest news and updates regarding the Reserve Bank of Australia (RBA) — the central bank of Australia — wholly owned by…

The US Federal Reserve

The Federal Reserve, often simply referred to as ‘the Fed’, is the central bank of the United States. Its self-described goal is to provide Americans…

Related articles

Residential Mortgage Backed Securities (RMBS)

Australia doesn’t have nearly as much government debt as Broken Europe. So the local solution is the CLF (Committed Liquidity Facility). This allows Aussie banks to deposit eligible securities with the RBA and in return the RBA will give the…

NAB and Westpac’s Secret Bailout Revealed

It’s time for an apology. No, not from your editor. We’re always right, so there’s no need to apologise [wink]. Instead the apology needs to come from the Australian mainstream financial press. The same financial press that told you…

Australia and its Population Control

The social engineers are in full flight. Now Australia has a Population Minister. We prefer to label it the “Population Sinister”, or even the “Population Tsar.” Of course, this isn’t the first time politicians have tried to manipulate the make-up…

An “Investment Experience” from Commonwealth Bank

This morning we’ve left Fitzroy Street and have headed into town to catch up with our old pal Chris Mayer, the US based editor of Capital & Crisis. He’s brought a bunch of American investors over for a tour…

How to Get a $200,000 Loan With a $2,000 Deposit

On our mind is the flaky and fragile Australian banking system. Do you remember it was only a few weeks ago that the mainstream press was telling you that the major banks were winding back their reliance on the government…