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Why do interest rates change?

Interest rates determine the cost of borrowing or lending money and are used to influence the rate of inflation and economic growth. But why do interest rates rise and fall, and how can they affect you?

Who controls interest rates?

The Reserve Bank of Australia (RBA) sets the official cash rate, the interest rate that it charges on overnight loans to commercial banks.

This cash rate affects all of us because it has a knock on effect on financial products, such as savings accounts, term deposits, mortgages and personal loans. It also impacts the cost of funding for the banks.

The RBA's objective is to promote a stable currency, full employment and economic prosperity, ensuring that price growth, or inflation, remains relatively low and stable.

Its 'monetary policy' involves either raising the cash rate to try and slow the economy down, or lowering it to promote economic growth.

The RBA's decisions are based on indicators including employment, inflation, gross domestic product, consumer and business confidence and the housing market.

If the economy is growing too fast it can lead to high inflation, while weak economic growth can lead to unemployment, reduced incomes and lower living standards.

Global outlook

The RBA also looks at important international factors that will drive the performance of the Australian economy, in particular demand for and the price of Australia’s natural resources.

If Australia’s trading partners are growing strongly and demand and prices of raw materials are rising, this can lead to strong economic growth in Australia and push interest rates higher.

If commodity prices and demand for our natural resources fall, this could point to slower growth in the future and lower interest rates may be necessary.

When do interest rates change?

The RBA board meets 11 times a year on the first Tuesday of each month, except in January. When they meet, they will raise the official cash rate, reduce it, or keep it the same.

For the current cash rate, refer to the RBA website.

This article is intended to provide general information of an educational nature only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice. All information in this article, including any information on taxation, is of a general nature only and is based on the continuation of present laws, rulings and their interpretation. As individual circumstances differ, you should seek appropriate professional advice.

Where to next?

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