How Interest Rate Changes Work

Interest rates affect you in more ways then you probably realise. The RBA works hard to maintain their policy objectives by adjusting this rate as they deem necessary. These adjustments are then passed down to you through your credit and investments at banks.

Interest rates are tricky little things that you need to understand if you are going to be financially successful. These rates are based on the Reserve Bank of Australia (RBA) and how they adjust the short term interest rates. These rates are directly related to the way that banks charge their customers interest. The short term loan rate is what banks charge as they borrow money from each other. This system is constantly in a flux of borrowing and repayment. When the RBA adjusts these rates the banks must follow suit in order to protect their investment.

As a consumer this might all be foreign to you, which is understandable because it is such a complicated system. When the interest rates go up banks have to spend more on these short term loans. They have to pass on that cost to their customers. If you are in the market for a home loan it will be reflected in the rates you are offered. If you have an adjustable rate home loan already your rates will increase which also increases the amount you spend on your payments toward that loan. The same is true of credit cards. However, many people have credit cards that have fixed rates which means the rate does not adjust with the market. If you already have a credit card you will probably not be affected by changes in the market, unless it is an adjustable rate card. But, if you are applying for a new card you will be subject to these rate changes.

If you have investments, especially term deposits which usually have an adjustable rate you will also be affected by changes to the market interest rates. These changes can be either positive or negative depending on how the rate has adjusted. That means that you could make more on your investment if it adjusts up or less if it adjusts down. All of this is based on your investment being at an adjustable or variable rate. If the rate is fixed changes do not affect your bottom line.

The RBA does not just adjust the market interest rates at will. They pay close attention to supply and demand of those short term loans. They then take in to consideration how to best maintain the value of the Australian currency, employment levels, and the economic prosperity and welfare of Australians. They then adjust interest rates accordingly.

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