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What’s the deal with interest rates?

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Interest rates are at historic lows in Australia, and are likely to stay at very low levels for the foreseeable future.
The Reserve Bank of Australia (RBA) cut official rates three times during the second half of 2019, reducing the cash rate from 1.50% to a record-low of just 0.75%.
And the RBA might not be finished yet.
After its last board meeting, in December, the RBA hinted that there might be more rate cuts in 2020. Here’s what the RBA said in the minutes of its December meeting:

  • The RBA will use its next meeting, in February 2020, to assess the impact of the rate cuts it made in June, July and October 2019
  • It has “the ability to provide further stimulus” [i.e. cut interest rates]
  • More rate cuts might help the RBA achieve its goals of faster economic growth, lower unemployment and higher inflation
  • The RBA is “prepared to ease monetary policy further” [i.e. cut rates] to achieve those goals

As the cash rate has fallen, so have mortgage rates

Lenders generally take their cue from the RBA, although they do operate independently.
That means lenders might increase or decrease their home loan rates even when the RBA is doing nothing.
It also means that lenders might move their mortgage rates up and down in tandem with the RBA, but by different amounts. So if the RBA changes the cash rate by 25 basis points (i.e. 0.25 percentage points), lenders might change their mortgage rates by 25 points or 18 points or 27 points or some other amount.
Since 2011, the cash rate has steadily fallen, from 4.50% to 0.75% today. Along the way, lenders have steadily lowered their home loan rates – including in the second half of 2019, when the RBA reduced the cash rate three times.
Interest rates have never been this low, which means it’s never been easier for Australians to repay their mortgage. It’s also possible that interest rates will never be this low again.

Other countries also have ultra-low interest rates

In the past, when the RBA brought the cash rate down, inflation would tend to go up.
However, even though the cash rate is at a record-low level, inflation is still extremely low – just 1.7%, which is below the RBA’s target range of 2-3%.
Other countries are experiencing the same thing: inflation remains low despite big cuts in official interest rates (even, in some cases, to below zero).

CountryOfficial interest ratesInflation
Euro area0.00%1.0%

Data accurate as of 23 December 2019

Rates should remain low in the foreseeable future

Time will tell whether the RBA continues reducing the cash rate in 2020.
Regardless, the RBA said “it was reasonable to expect that an extended period of low interest rates would be required” to support the economy.
So even if official interest rates don’t fall further, they’re unlikely to increase anytime soon.
Sooner or later, interest rates should start rising again. When will that happen? It’s impossible to predict a date, but it’s likely that the RBA won’t increase the cash rate until inflation and/or economic growth start climbing.

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