Interest Rate Hikes, Savers Rejoice!
AFP: Australian central bank hikes interest rate — Australia’s central bank raised its key interest rate by 25 basis points Tuesday to a fresh 12-year high of 7.25 percent in a bid to curb inflation amid robust economic growth.. Seriously, probably because I did engineering at university (instead of commerce or economics), I still cannot work out how monetary policy pilots the economy. You see, rising interest rate should hopefully make “credit” more expensive to get, thus it should hopefully reduces the disposable income of an average family (big mortgage, heavily debited on credit card), thus it should hopefully cool down the market and reduce inflation.
Obviously, the assumption is that the big spending are on credit. Maybe it is true, but everywhere I go there are always big spenders that are not on any debt (young renters, people who have paid off their mortgage, etc). Anyway. While the latest interest rate rise might be a double blow that puts lots of pressure on struggle families, at least it is a great news for those who saves (especially when ASX is not doing too well either).
One of my favourite section on OzBargain is the Financial Category, where “bargain hunters” all share the latest and best saving schemes (Kevin, we hear ya!) Note — these are not those “make fast money on the Intraweb” schemes but mostly saving accounts offered by various financial institutions in Australia, fine prints checked by OzBargain members!
For example,
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RaboPlus — 7.30% Online Saving Account. One of the highest rate saving account with a nice web interface + “Digipass” their authentication device.
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BankWest — 7.75% Online Saving Account (honeymoon rate for 1 year, 7.25% afterwards). Best rate if you are not yet a BankWest customer. Their online banking interface has got a bit better (although I was having heaps of trouble 2 years ago).
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Members Equity — 7.50% Online Saving Account. Probably the best non-honeymoon rate although I have no experience with them. Definitely a bank to look out for.
Many online savers are also offering term deposit at around 8-8.15% for 6 month, but lower for 12 months. Maybe the interest rate is predicted to drop within a year?
I believe that when the reserve bank increases interest rates it is mainly hoping to stop businesses from spending money on new projects (which is a major reason for inflation). Most businesses (ie big public companies listed on the ASX) have a significant amount of debt compared to savings, so new projects are usually funded by borrowing money. If interest rates are high then businesses are less likely to go ahead with this project as it may not be profitable for them at high interest rates.
Of course interest rates are a really blunt tool. It also affects consumer spending (as you observe, that doesnt stop everyone from spending), and hurts people who are barely struggling to pay off the mortgage (who werent spending lots of money anyway!).
@young_dazza — thanks it makes sense.
I do work for an ASX-listed company though but they are debt free (as I was taught). No wonder they are working us hard on new projects :(
Central bank monetary policy is a little bit more complicated than that…. When it ’sets’ interest rates, the RBA targets the offical cash rate - which is the rate than banks charge each other for overnight loans. Banks have to maintain a certain amount of liquidty at the end of a day’s trading, and one way of ensuring this balance at the end of the day is by borrowing money from other banks overnight.
Inflation effectively occurs when the money supply of the economy grows faster than the production of goods and services. If there is more money ’sloshing’ around, and no more goods to spend it on, then prices go up.
The RBA tries to reduce future inflation by reducing the amount of money in the economy. One way of doing this is by increasing the amount of money banks must hold at the end of each day. As money becomes scare (for things like loans), the cost of using that money - the interest rate - rises.
Sorry, am a professional economist and just get frustrated when people ‘bash’ the RBA for targeting ’struggling’ people with mortgages. It is a little bit more sophisticated than that.
Hey scotty
The key as dazza intimated is inflation. Inflation comes from new money entering the economy through the form of newly created debt. So if you reduce the amount of money coming into the economy through debt (businesses, credit cards, mortgages), and increase the amount going to service debt (ie. dead money) then you can help drop inflation.