Why Are Interest Rates Rising in Australia?
Written by Bindi Gethen
Watching interest rates soar can trigger uncertainty and anxiety. You start to wonder what it means for you. Are your dreams of owning a home or starting a business about to become more expensive? Are your hard-earned savings now worth less? These are all legitimate concerns.
So why is Australia’s interest rate so high? Australia’s interest rate is high primarily due to the policies implemented by the Reserve Bank of Australia (RBA) in response to economic conditions. The RBA uses interest rates as a tool to manage inflation and stabilise the economy. If the economy is showing signs of overheating – growing too quickly, or inflation creeping up – the RBA will raise interest rates to cool down the economic activity.
Why is Australia's interest rate so high?
Understanding the dynamics of the economy is not just a task for economists and central bankers. As someone who holds a bank account, takes loans, and saves money, it’s vital for you to understand the elements that influence your financial well-being. One such crucial element is the interest rate.
In Australia, we’re seeing higher rates compared to recent years. Interest rates are the heartbeat of an economy. They’re meticulously monitored and carefully managed by the Reserve Bank of Australia who is in charge of crafting strategies that respond to shifting local and global economic scenarios.
For instance, during an economic boom where consumer spending is rampant, inflation can creep in. Too much money chasing too few goods leads to rising prices. To prevent this inflation from spiralling out of control, the RBA may increase the interest rates. This is done to encourage saving rather than spending, thereby reducing the demand for goods and services and bringing down inflation At least, that’s the theory side of things.
How does this all play out in real life? Think back to the late 2000s. Australia was in the midst of a mining boom. The world couldn’t get enough of our commodities, and our economy was growing rapidly. Job creation and wage increases were the order of the day. However, this rapid expansion gave birth to inflation. To rein it in, Australia’s central bank increased interest rates, hitting a high of 7.25% in 2008.
This situation directly impacts you as an account owner. When interest rates rise, the cost of borrowing increases. So if you have a mortgage or are planning to get one, it would be more expensive. On the other hand, if you’re a saver, high-interest rates could mean higher returns on your savings.
When do interest rates go down?
Generally, interest rates are reduced in two main situations – when the economy needs a boost or when inflation is on the lower side.
When the economy is underperforming or in recession, people tend to hold back on spending due to uncertainty. Businesses might hesitate to invest, and consumers may save their money instead of purchasing goods and services. People hold onto their money tighter. This decreased demand can lead to a slowdown in economic activity which, in turn, can lead to job losses and further economic deterioration.
So the RBA steps in, cutting interest rates to make borrowing cheaper and saving less appealing, thus encouraging spending.
Then we have inflation, an economic concept that affects the price of your morning coffee to the cost of your home. When inflation is low, prices are generally stable. The RBA might reduce interest rates to push inflation to their target level (as a moderate level of inflation is often a sign of a healthy economy).
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Learn how to use interest rates to your banking advantage
Interest rates might seem like financial jargon meant for Wall Street traders, but they’re not. They’re banking concepts that you can use to your advantage. Finance people weren’t lying when they say you can make your money work for you.
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Hey, my name’s Bindi Gethen! I’m the founder of The Bookkeeping Studio in Australia. With over 15 years of experience in the industry, I have a deep understanding of the challenges that small and medium-sized business owners face when it comes to managing their finances.
I am passionate about empowering my clients with the financial information they need to succeed. My team and I pride ourselves on our commitment to exceptional value, accuracy, and confidentiality. Our virtual bookkeeping services include payroll, budgets, and management reporting, among others.
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