Those who are considering buying their first home or who have already done so, will be familiar with interest rates and their instability. What they probably don’t know is how and why interest rates change (and no, the reason is not to annoy people).
An Integral Part of the Economy
You might consider interest rates as necessary evil, but they are an element of the sensitive ecosystem that is part of our economy. They help keep inflation stable when the economy is good and promote economic growth during a financial crisis.
Rising interest rate policy is intended to control a robust economic activity where price increase, or inflation, is rising beyond normal levels. This is accomplished by lowering demand in the market – by increasing borrowing costs. Declining interest rate policy is designed to encourage a bearish economy by boosting demand – by reducing borrowing costs.
The Up and Down
So, who sets interest rates? It’s the Reserve Bank of Australia (RBA) that sets these powerful little percentages. The RBA board convenes 11 times annually to decide whether to increase, lower or keep rates steady.
Essentially, the RBA’s monetary policy aims to keep the balance of the national economy. Interest rates, which influence mortgage rates for home lending, is governed by this policy. The official cash rates (the interest rate the RBA applies on overnight loans to other commercial banks) is changed based on internal factors such as economic growth, wage growth, employment rates, inflation, the housing market, and more. They are also influenced by international matters, such as global interest rate activity, export prices and demand.
Normally, bank mortgage rates for home loans fluctuate because of the ups and downs by the official cash rate decided on by the RBA every month. Both variable and fixed mortgage rates are in effect influenced by the level of the official cash rate.
Those unstable numbers that make up your mortgage are more than what they appear – they are an element of a system that helps measure and preserve the health of our economy both during an upturn and a downturn.