Understanding interest rates
For many of us, our understanding of interest rates does not extend much further than how they impact on our home loan repayments. But the reality of it is, the official cash rate in Australia is a tool that is used to help the overall economy. So let’s take a look at a couple of questions you might have when it comes to interest rates.
So what is the cash rate that the Reserve Bank (RBA) sets?
The official interest rate is the cash rate. The cash rate is the rate charged on overnight loans between financial intermediaries and is determined in the money market as a result of the interaction of demand for, and supply of overnight funds.
In Australia, the Reserve Bank is responsible for setting the official cash rate and it meets on the first Tuesday of the month to decide how to set it. The setting of interest rates is the key tool that the RBA has to effect monetary policy. For the broader economy, monetary policy should seek to create stability, maintain employment and protect the economic prosperity and welfare of the nation
So what do low cash rate mean?
The official cash rate in Australia is currently sitting at 2%. This represents a 50 year low for the country. The low cash rate naturally flows on to the wider economy via financial institutions. A low cash rate is designed to stimulate the economy. A low cash rate allows borrowers and investors to confidently borrow money. This in term stimulates the economy as well as employment.
For the real estate industry, low cash rates have a huge impact. The current low interest rates are luring new buyers and investors in to the market and also encouraging people to swap up to a larger property.