interest rate interest is rising: carefully consider interest rate movesInterest rate interest is rising

Interest rate interest has risen in the post-GFC ‘recovery’ process, especially as those who are dependent on the income they receive from their investments is what is funding their lifestyle: their very existence!

Australians should all be interested in what happens on the first Tuesday each month (not just on Melbourne Cup Day in November!), as we are all impacted in one way or another by the determinations the Reserve Bank of Australia (the RBA) make on official inter-Bank cash interest rates.

For some of us it means deposit interest on savings and investments will move in a like manner; for some it means borrowing costs will be ‘similarly’ affected; and for all of us, that determination affects the flow of money in the economy.

Can we know which way interest rates will move next?

We recite the following pieces by a prominent Australian Economist: not at all to embarrass him, but to show that in this ever-changing global economy, even the experts can’t forecast economic and financial circumstances with any certainty:

In December 2009, Craig James (Chief Economist at CommSec), presenting at the FinSIA Financial Services Conference made the following comment: “A year from now the cash rate will most likely be around 4.50% – a level that will make the Reserve Bank much more comfortable. While a cash rate around 5% has been regarded as ‘neutral’ monetary policy setting in the past, this may prove too high if the Aussie dollar remains close to, or above, US90cents. A strong currency not only leads to lower prices of imported goods and lower inflation but it makes it tough for exporters and tourism.”

In response to a question in relation to the impact of interest rates on investors, he is quoted as having commented – “Around a third of people rent, a third of people own their own homes outright and a third are buying homes. …over time, the proportion of home owners with a mortgage has been rising. So the community is far more interest rate sensitive….; and – The Reserve Bank will continue to ‘normalise’ rate setting over 2010 – that is, lift rates to more ‘normal’ levels in line with more ‘normal’ economic conditions.”

For the record, interest rates set by the RBA fell to their lowest ever recorded level in August 2016, to 1.50%. There are forecasts that this could yet fall to 1.00%.


How does the determination of the Reserve Bank impact on the rates we are charged by our Banks (or that we receive on savings, from our Banks)?

As you may have observed, the interest cost on loans often increases by the amount of the RBA increase – and often increases by an amount greater than their official increase. Contrasting the lending costs, rarely does the credited interest rate on deposits increase by an amount in excess of the ‘official’ increase. As has also been observed as the RBA has reduced rates over the past few years, the lenders of the country have not all reduced the interest on loans by the equivalent amount!

Has your interest rate interest been aroused? The experienced advisers at Continuum Financial Planners Pty Ltd advise clients to take particular care when considering ‘fixing’ interest rates on their loans. In all cases, we strongly recommend that clients seek advice from us before entering into any new mortgage or debt commitments; as well as in the event of any proposed variation to their debt structures. Our process is ..’to listen (to your wishes and your needs), to understand (your capacity to manage the process to achieve your goals) and to have solutions (that will best serve your circumstances).’ Check our website article Library and Contact Us for an obligation-free, initial meeting to consider your financial needs and how they might best be met.

[Originally posted 17 February 2010, this article has occasionally been refreshed, most recently during August 2016.]