The Interest Rate and You

After analysing all of the domestic and global economic data, the Reserve Bank of Australia (RBA) has once again decided to leave the official cash rate on hold at the historically low rate setting of 1.5%.

According to the Board, the Australian economy is tracking along “nicely” at the moment, with property prices tracking higher across most markets and unemployment continuing to hover around record lows.

This is good news for some, especially home owners and potential buyers. When you are paying a mortgage it’s of great comfort to know that you can continue paying the same monthly amount, or if you have been paying the mortgage off at a higher amount to get ahead. Particularly with such low interest rates. If you’re a millennial ask your grandparents what their mortgage interest rate was in around the 1980’s. Yes, it was 18%!

What Does It All Mean?

If you’re like the majority, the only aspect of an RBA announcement is whether the rate will go up, stay steady, or go down. Not many people really understand the many factors involved in the setting of a country’s interest rate. Then again, some banks make their own rules and don’t follow the RBA’s guide and raise the rates anyway. Why? Well, at 1.5%, they aren’t making a lot of profit on buying and selling on the money market.

Here’s a quick look at the many inputs from our own and global economies that determined why the RBA held rates at the current level.

Wages – remained steady and inflation is subdued.

The Labour Market – some growth expected. There are jobs out there for those looking. A healthy outlook.

Oil Prices – remain at a low price and expected to stay that way.

USA Interest rates – expected to rise.

Australia’s Inflation Rate – expected to stay at about 3%.

Mining Investment – a decrease expected.

Residential Construction – High at the moment, but expected to ease.

AUD to USD – the Aussie dollar has increased against the US dollar. A higher exchange rate tends to suppress economic activity.

Housing Prices – still rising in some areas but declining in others.

Rent – low increases only recorded in all states.

As you can see, mitigating factors involving every aspect of the economy are taken into consideration. If there are big variations or changes in any of the above, the RBA has the responsibility to steady the ship, and avoid panic.