Understanding the factors that impact Australia’s interest rates - Kredi Home Loans

Insights, Loan basics

Understanding the factors that impact Australia’s interest rates

Oktay Sengoz

|

21/06/2023

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2 mins read

If you’re a mortgage customer in Australia, it’s essential to grasp the factors that influence the monetary policy managed by the Reserve Bank of Australia (RBA).

Monetary policy plays a significant role in shaping the economy and has direct implications for interest rates, which affect your mortgage repayments.

As we have seen 12 rate rises in the last last 13 months, all mortgage holders are now feeling the financial pressure.

Here are the key factors that impact Australia’s monetary policy

Economic growth

The RBA closely monitors the country's economic growth as it affects inflation and employment. When the economy is growing too quickly, it can lead to inflationary pressures. To combat this, the RBA may raise interest rates, making borrowing more expensive and cooling down the economy, which is what we have seen happen over the past 13 months. On the other hand, if the economy is sluggish, the RBA might lower interest rates to encourage borrowing and stimulate economic activity. This is what we saw the RBA in the middle of COVID-19, when the interest rates were below 2%.

Inflation

Inflation refers to the general increase in prices over time. The RBA aims to keep inflation within a target range of 2-3% per year. If inflation exceeds this range, the RBA may increase interest rates to reduce spending and curb inflationary pressures. This is what we are seeing now. Conversely, if inflation remains low or falls below the target range, the RBA may lower interest rates to encourage spending and stimulate economic growth.

Employment and unemployment

The labor market's health is crucial for the RBA's decision- making. Low unemployment rates indicate a robust economy, while high unemployment rates signal a weak economy. When unemployment is high, the RBA may reduce interest rates to encourage businesses to invest, expand, and create more jobs. Conversely, if the labor market becomes tight, with low unemployment rates and potential wage pressures, the RBA may raise interest rates to prevent excessive inflation and maintain economic stability. Right now we are seeing low unemployment rates, another reason why rates are going up.

Global economic conditions

Australia's economy is closely connected to global economic trends. The RBA considers global factors such as international trade, commodity prices, and financial market conditions. Global events, such as changes in major economies or shifts in investor sentiment, can impact Australia's monetary policy. If there is global economic instability or uncertainty, the RBA may adjust interest rates accordingly to mitigate potential risks.

Financial stability

The RBA also monitors the stability of the financial system. Excessive borrowing, risky lending practices, or volatile asset prices can pose risks to financial stability. In such cases, the RBA may employ macro-prudential tools, such as adjusting lending standards or requiring banks to hold more capital, to manage these risks. These measures aim to maintain a stable and resilient financial system that supports sustainable economic growth.

Understanding the factors that impact Australia's monetary policy can provide valuable insights for mortgage customers. Economic growth, inflation, employment, global economic conditions, and financial stability are among the key considerations for the Reserve Bank of Australia. By staying informed about these factors, you can better comprehend why interest rates fluctuate and make informed decisions regarding your mortgage.

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