Interest rates rising isn’t always a bad thing: it can reflect a very strong economy and it can pave the way for better earnings – for some, at least.
Interest increases in what the Reserve Bank (of Australia – the RBA) will do with interest rates when they meet on the first Tuesday of each month – and whilst ‘odds’ are given by a range of economists ahead of each meeting of the Board, they are only setting the official rate for transactions between ‘the Reserve’ and the Banks. The Banks (and other lending institutions) vary their rates, usually in concert with each other, at various times throughout the year – not always tied to the RBA meetings.
The financial ‘press/ media’ usually abounds with speculation as to what the Banks will do consequential to the RBA moves –
- Will the Banks have the temerity to increase by a factor greater than the RBA?
- Will the government have enough political clout to influence them to stay more in line?
What influences interest rates rising (for borrowers other than Banks)?
There are several factors that are taken into account by lending institutions when they are setting interest rate schedules: they include –
- Demand for borrowing (the funds available to lend);
- Cost of capital (to lend);
- Risk of the borrower defaulting;
- Quality of the asset securing the loan; and
- Competitiveness of the market.
(There are other factors considered by lending institutions in deciding whether to make loans available, such as credit and economic conditions, borrower credit history, asset valuation certainty etc – but these factors don’t necessarily influence the base interest rate.)
What influences the RBA decision on interest rates?
The RBA undertakes extensive economic and market research, examining all available, relevant data and the progress of their attaining their objectives of: keeping control of inflation (within defined parameters); maintaining healthy economic growth; and maintaining full employment, before arriving at their decision.
Is interest rates rising always a problem?
There is always some good news in these matters – and in this case, if the interest rates increase, there should also be an increase in the interest paid by the banks on deposits: and that will mean more disposable income for investors (and retirees).
Managing interest rates rises
If increasing interest rates on home mortgages are a concern for you, speak to your financial adviser at Continuum Financial Planners Pty Ltd to arrange a budget review to ensure appropriate cash flow planning is undertaken to comfortably manage your commitments. You could also develop a strategy to convert ‘bad debt’ into ‘good debt’.
(This article was originally posted in December 2009; it has been occasionally updates/ refreshed, most recently in January 2019.)