Interest Rates 101

Although the Board of the Reserve Bank of Australia has a full agenda at its monthly meetings, the one item most economists and mortgage-holders eagerly anticipate is the cash rate decision. Up, down or steady?

The official cash rate is now 1.5% after the RBA’s last reduction in August 2016 in the continuing hope of stimulating economic growth.
But while the experts have been monitoring the manoeuvrings of the RBA, the major banks have decided to go it alone and increased rates on new loans to both investors and home owners; so what does this mean?

If you are concerned with this change in direction and feel it’s time to buy property or make changes to your mortgage, it makes good sense to understand what has driven the cash rate consistently down since 2011 so you can make an informed decision.

What has affected our interest rates?
Australia emerged from the Global Financial Crisis a relatively strong economy, especially compared to the US, UK and much of Europe. To ensure our inflation didn’t get out of control, the RBA steadily increased interest rates until November 2010, holding them at 4.75% until November 2011.

However, global growth did not meet expectations over the ensuing two years, so the RBA’s Board recommenced rate reductions in early 2013 until they touched a then remarkably low 2.5% in August.

Although that move stirred the sleeping giant and attention to property started to return; it wasn’t fast enough. With inflation falling below 3%, the RBA further decreased rates to just 2.25% in February 2015, and again three months later to a then historically paltry 2.0%.

Then in November 2015, to the amazement of many, the major banks each announced small rate rises to cover the extra costs imposed by stricter banking regulations.

After almost a year of holding the rate at 2.0%, just hours before the handing down of the Federal Government Budget in May 2016, the RBA board announced a rate cut to 1.75%.

But that wasn’t the last of it – the August 2016 meeting heralded another drop to a miniscule 1.5% pa.

2017 has witnessed a change in banking policy with the major banks increasing rates regardless of the RBA’s lead. How far they will go is anyone’s guess.

Is it time?
There’s a saying about the stock market, “nobody rings the bell at the bottom”. Economies can take a long time to turn around but when they do, you can be sure there will be rapid changes. Is this what we are seeing now?

With rates still at historically low levels, it might be a good time to shop around for a better deal. But look carefully at the options available and any associated costs that a switch might incur.

The only constant in life is change, so a long-term mortgage will never remain static.