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 Financial Happenings Blog 
Tuesday, November 07 2006

Interest rates went up today to 6.25%.  This is not good news for home owners with mortgages.  It is good news for people with investments in cash management accounts.

The official announcement from the Reserve Bank of Australia is here.

Adjustments to interest rates in an economy are known as 'monetary policy'.  The aim of monetary policy in Australia is to keep interest rates at between 2 and 3%.  This is alluded to in the Reserve Bank statement.  Raising interest rates gives people less money to spend, and less inclination to borrow and spend, and so decreases the demand for goods.  In turn, this decreased demand decreases the likelihood of inflation.

The board made this statement about their deliberations: "The Board judged this to be an environment in which the risks of inflation exceeding 2-3 per cent over the medium term remained significant."

This is the third interest rate rise this year, each by 0.25%.  What is interesting is that early in the year the forecast was for interest rates to fall, not rise.  It shows how tough it is to forecast these things. 

Keep in mind that as interest rates rise, asset prices (such as property) tend to rise.  There is a lot of talk about how attractive superannuation is as an investment - and it is true - however I think that the first goal of people should be to pay down enough of their mortgage so that they can cope with any unforeseen and significant jumps in interest rate comfortably (say to 18% - it has happened in the past).  The worse scenario would be defaulting on a mortgage with interest rates high, having the property sold while it has fallen in price and having to finish paying off a mortgage in the future.

Posted by: Scott Francis AT 07:17 pm   |  Permalink   |  Email
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