I have seen a lot of posts talking about interest rates lately so I wanted to open a thread to discuss interest rates overall. I searched through the forum and couldn't find anything.
What I would like to discuss is:
– Why does the reserve bank change interest rates?
– What local and global activities affect their decision to change interest rates?
– Is there any correlation between inflation and interest rates?
I understand that they do it to keep the economy stable and growing. But I don't understand how it all works and why they make their decisions.
I know some of the finance guys in here will be all over this.
Thanks in advance
Ryan McLean | On Property
http://onproperty.com.au
Email MeWithout getting into an in-depth post it's just monetary policy – they increase rates to slow down the economy and reduce rates to stimulate it. http://www.rba.gov.au/monetary-policy/
Cheers
Jamie
Jamie Moore | Pass Go Home Loans Pty Ltd
http://www.passgo.com.au
Email Me | Phone MeMortgage Broker assisting clients Australia wide Email: [email protected]
ryan mclean wrote:– Is there any correlation between inflation and interest rates?
.
Thanks in advance
Ryan,
There is one interesting theory, I was researching for a long time in relation to Inflation and Interest rate.
Inflation and Interest rate determine the price of Housing. In any Country rate of growth on Housing is Rate of Inflation + Interest Rate. I am still on the way to finish my readings.
House price growth = Inflation + Rate of Interest. (you have to see 10 years span).
Take any country, this is will true. Will publish graphs soon. Thats the reason I think next year house prices in Australia will increase by 4.5%. It can be taken as purely speculative theory as well. Please post your comment on it.
Thank you.
Hari Yellina
Email MeKeep Investing - Grow while Resting.
The reserve bank act in response to the global and australian economy.
when it goes to shit, they drop rates
when it runs well they rise rates.
Expect a few rate rises over the next few years.
also just because we have had the lowest levels of rates in recent years. Doesn't mean anything really except that people that are saving money are getting the smallest rate of return after inflation. And that the level of debt has risen higher that enables banks to have lower rates because the avg mortgage is now higher then it was 10,20,30 years ago.
wilko1 wrote:when it goes to shit, they drop rates
when it runs well they rise rates.
lol – why didn't the lecturer just say that during my semester on monetary policy 10 years ago at Uni…..would saved us all a whole lot of time
Cheers
Jamie
Jamie Moore | Pass Go Home Loans Pty Ltd
http://www.passgo.com.au
Email Me | Phone MeMortgage Broker assisting clients Australia wide Email: [email protected]
ryan mclean wrote:– Why does the reserve bank change interest rates?
To control the price of debt. This slows or speeds up the creation of debt. Think property. The cheaper the price of debt (mortgages) the more people can afford them, the greater the demand for houses and the greater the pressure on prices (inflation).
Quote:– What local and global activities affect their decision to change interest rates?The cost of currencies or the exchange rate. Think imported goods and services. CB's may lower the cost of money to encourage demand and create downward pressure on supply which usually increases the price therefore reducing deflation. The opposite works for inflation.
Interest rates affect the return on capital so foreign investment (govt/corporate bonds) may purchase your currency (for local investment) and create demand for that currency thereby pushing up its relative value.
Quote:– Is there any correlation between inflation and interest rates?Interest rates are used as a tool to manage the inflation/deflation rate. NOTE: inflation is defined as an increase in the money supply not the price of goods. That usually falls under the CPI (consumer price inflation). There are many types of inflation.
For a more complete answer try reading this (AU is the same)
http://www.rbnz.govt.nz/monetary_policy/about_monetary_policy/0072140.html
The reserve bank uses monetary policy to maintain the economic growth at a sustainable level. This is inflation at 3% max. If inflation gets higher their is a risk of hyper inflation. And if the CPI growth level is too low then the economy slows down which is not good either so 2% to 3% is the ideal range.
The strength of the Aussie Dollar affects the interest rate decision. If as an example the USA interest rate was 0.5% and the Oz interest rate was 10% then US investors would invest in AUD rather than USD as the deposit rate would be better, This transfer on money into Aus would strengthen our dollar against USD and make our exports dearer to buy for other countries. This affects our balance of trade as less exports compared to imports would occur.
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