In August 2013, the RBA announced that the official cash rate would be lowered to 2.5%, setting a new record low for interest rates in Australia.  In the months leading up to this historic decision, many of us watched with anticipation to see just how low the interest rates would drop and what that would mean for our savings and our mortgages.

The interest rate has been stable now at 2.5% for the last six months and much of the excitement on the first Tuesday of the month to see what the official decision will be has subsided.  It may seem as if the RBA chooses to increase or decrease the rates on a whim, however there are number of economic factors that contribute to the rate decision each month.

WP RBA Rate

International and domestic economic performance are two of the main factors in the decision each month.   The RBA will look at the strength American, European, and Asian markets and their respective currencies as well as any changes to their fiscal policies and employment rates.  Locally, the RBA will consider many of the same factors and will also look at GDP figures, business growth rates, and loan applications.  The health of the financial system is also a major domestic factor that the RBA takes into account – the RBA Board will look at how banks are performing in terms of the amount of loans and term deposits they have opened during the previous month.

Many of our clients have been asking how the low interest rates will affect their investments and business growth.  How the interest rates may affect you will ultimately depend on your individual circumstances, but generally speaking there are a few things to consider.  A lower interest rate usually means that you will be able to secure a home loan at a more affordable interest rate, and if you are able to lock that low rate in for a long period of time, you will be able to save considerable amounts over the lifetime of your loan.  Business owners may feel some negative affects by the lower rates, as this can sometimes signal tough economic times ahead.  Another possibly negative affect from lower rates is that returns on term deposits and other savings options may fall.

In their recent media release regarding the March 2014 rates decision the RBA Board said,

“Over time, growth is expected to strengthen, helped by continued low interest rates and the lower exchange rate. Inflation is expected to be consistent with the 2–3 per cent target over the next two years.  In the Board’s judgement, monetary policy is appropriately configured to foster sustainable growth in demand and inflation outcomes consistent with the target. On present indications, the most prudent course is likely to be a period of stability in interest rates.”

If you have any questions how the RBA makes its decisions or what the current rates mean for you, please don’t hesitate to contact us on 02 1988 9955 or mail@wealthpartners.net.au

 

 

Sources:  http://www.rba.gov.au/ and http://www.canstar.com.au/