A Guide to Interest Rates (Australia) by Mozo Credit Cards

Who Sets Interest Rates?
Financial matters are all governed by the federal bank. In Australia, the federal bank is called the Reserve Bank of Australia and it sets official interest rate levels, otherwise known as the cash rate.

The interest rates that Australians pay for financial services such as home loans and personal loans are partially influenced by the official cash rate set by the Reserve Bank. By setting the official interest rate levels at 0.25 percentage point increments, the Reserve Bank in turn shapes the economy and financial markets.

What Influences the Interest Rate?

While the federal banks set official interest rates, they do so in light of the existing economic climate so as to prevent inflation. If the federal bank expects high future inflation because of increased wages from a constrained workforce, which could curtail profits and borrowing capacity, then interest rates will increase. The flow-on effect will lower the chance of inflation by stimulating the economy and increasing borrowing capacity.

What is the Current Interest Rate?

The Reserve Bank announced a 0.25% decrease in official interest rates to 3.0% in April 2009, the lowest since the 1950s. However, the four major banks refuse to pass on the full benefit of the latest interest rate cut to their borrowers, despite the urging of of the Prime Minister and consumer groups.

The Commonwealth Bank, ANZ and Westpac have all made a mere 0.1% drop to their mortgage rates, while interest rates with the National Australia Bank remains unchanged. Most other mortgage lenders have been quick to follow the lead of the big banks, rendering the April interest rate cuts virtually unbeneficial to home buyers and mortgage holders.

Since September 2008, the Reserve Bank has made five consecutive rate cuts with some economists inferring further rate cuts in the future, though this will depending on the health of the economy and the flow-on effect of the current cash rate.

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