Interest rates, an effective tool to contain inflation?
Team Veye | 09 May 2022
Inflation occurs when an economy grows due to increased spending without an accompanying increase in the production of goods and services. When this happens, prices rise and the currency within the economy is worth less than it was before. The consumer's buying power declines because the rate of wage and income growth does not keep up with the rate of inflation.
Every government wants to maintain a stable and growing economy backed by a good financial system. The Reserve Bank of Australia has the responsibility of maintaining the stability of the financial system in the country.
The Bank has a duty to contribute to the stability of the currency, full employment, and the economic prosperity and welfare of the Australian people. It does this by implementing its monetary policy using a variety of tools. The primary tool of monetary policy is the cash rate target.
To achieve its objectives, the Bank has an inflation target. Controlling inflation preserves the value of money and encourages strong and sustainable growth in the economy over the longer term.
When the government wants to boost spending, it lowers the interest rates. Doing so, makes borrowing relatively cheap and encourages higher levels of consumption and investment. Cheaper borrowing can lead businesses to take out loans and expand. Lower mortgage rates, typically lift home sales.
On the other hand, interest rate increases help contain inflation as consumers spend less when the cost of borrowing rises.
Recently, RBA increased the cash rate for the first time in more than eleven years. It hiked the cash rate by 0.25% taking it to 0.35% and signalling more rate hikes ahead.
All four of Australia's major banks are passing on the rate increase to their customers. Commonwealth Bank Australia announced that it would be increasing its home loan variable interest rates by 0.25 per cent per annum, which will come into effect on May 20. While ANZ will also increase variable interest home loan rates by 0.25 percent from May 13, Westpac has also increased its home loan variable interest rates by 0.25 per cent for new and existing customers. NAB increased the standard variable home loan by 0.25 per cent to 4.77 per cent and the reward saver bonus interest rate is increased by 0.25 per cent.
Veye Pty Ltd(ABN 58 623 120 865), holds (AFSL No. 523157 ). All information provided by Veye Pty Ltd through its website, reports, and newsletters is general financial product advice only and should not be considered a personal recommendation to buy or sell any asset or security. Before acting on the advice, you should consider whether it’s appropriate to you, in light of your objectives, financial situation, or needs. You should look at the Product Disclosure Statement or other offer document associated with the security or product before making a decision on acquiring the security or product. You can refer to our Terms & Conditions and Financial Services Guide for more information. Any recommendation contained herein may not be suitable for all investors as it does not take into account your personal financial needs or investment objectives. Although Veye takes the utmost care to ensure accuracy of the content and that the information is gathered and processed from reliable resources, we strongly recommend that you seek professional advice from your financial advisor or stockbroker before making any investment decision based on any of our recommendations. All the information we share represents our views on the date of publishing as stocks are subject to real time changes and therefore may change without notice. Please remember that investments can go up and down and past performance is not necessarily indicative of future returns. We request our readers not to interpret our reports as direct recommendations. To the extent permitted by law, Veye Pty Ltd excludes all liability for any loss or damage arising from the use of this website and any information published (including any indirect or consequential loss, any data loss, or data corruption) (as mentioned on the website www.veye.com.au), and confirms that the employees and/or associates of Veye Pty Ltd do not hold positions in any of the financial products covered on the website on the date of publishing reports. Veye Pty Ltd hereby limits its liability, to the extent permitted by law to the resupply of services.