A country’s economic stability and growth rate can be attributed to its interest rate. Japan’s current economic problems are proof of this statement. A shrinking economy and a near negative interest rate are clear indicators that the country’s economy is in serious trouble. The monetary history of a country is quite fascinating when looked at in this light, especially considering the rapidity of liquidity flow in the technological era. A slight dip in the interest rate can have investors in a flurry while having little effect on borrowers while a large decrease can encourage consumers and discourage investors. The interest rate has been wielded as a tool to control cash flow and inflation in the twenty-first century and is thus a very significant policy of any Central Bank.
But first: what is an interest rate? Simply put, interest is the price of capital. To most people, the interest rate is the rate of borrowing. It is how much interest you will have to pay back on a loan. Since lending is one of the main functions of a bank, the interest rate is of great consequence.
Next, who controls the interest rate? In Australia, the interest rate is controlled by the Reserve Bank of Australia. This is an autonomous body that is not accountable to the government or the people of Australia. In some countries the Central Bank is under the control of the government.
The Reserve Bank sets the cash rate, which is the money market interest rate, (meaning it is not adjusted for inflation), and banks typically add a margin of 1.8% to 2.5% to offset the effect of inflation.
Let’s start from 2006. The cash rate in Jan 2006 was 7.3. This would be considered pretty high right now. The cash rate hadn’t changed at the middle of the year: it remained 7.3 in July. At the end of year however, there was an increase. The new rate was 7.55.
In Jan 2007, the rate was 7.55, same as the month before. Middle of the year the rate was 8.05. That’s an increase of 1.05: pretty big! By the end of the year, the rate was still the same at 8.05.
In Jan 2008, the rate remained unchanged. It increased by July, to 8.70. The increase from July to December is unreal though: in December 2008 the rate was 9.45!
The following year, there were quite a few fluctuations. Starting at 9.45 in Jan 2009, the rate dipped to 5.95 in July. The rate dipped even further, and was 5.55 in December.
2010 was another year of volatility. The rate was 5.55 in Jan and by July it was 6.65. In December it increased yet again to 7.40.
From 2011 to 2012, the rate dipped and rose consistently between 7.79 and 6.60.
From 2012 onwards, there has been a steady decline. In Dec 2013, the rate was 5.53. In Dec 2014, the rate was 5.51. In Dec 2015 the rate was 5.35. This rate has proved long-lasting: in April 2016, the rate was again 5.35.
As you can see, the interest rate has declined considerably these last few years. Fluctuations have also decreased, and the rates are proving more stable. What does that mean for the home loan market? It means you will have to pay less, and that you won’t have to worry about the rate increasing on you. So if you wanted to invest in property, it looks like now is a great time!