Why do interest rates in Australia change and who controls it?

The Australian Government is limited to two main means of influencing our national economy, called fiscal and monetary policy.

 

The Government’s annual budget for raising revenue and how that money will be spent is part of Fiscal Policy, and any major changes to Fiscal Policy, such as changing from the sales tax system to the good and services tax (GST) can take quite some time to fully take effect and make their mark on our economy.

 

Monetary Policy is the set of government rulings that allow for such actions as the Reserve Bank of Australia setting loan interest rates to control economic factors such as inflation and foreign exchange rates. The changes in interest rates have a more immediate effect on our economy and they can fluctuate from day to day.

 

The board of the Reserve Bank of Australia meets on the Tuesday of each month (excluding January) to discuss interest rates and other monetary policy. For several days before each of these meetings the media often discusses and speculates on the changes the board might make, according to current economic climate influences.

 

Traditionally, any interest rate changes made by the board at these meetings are announced on the Wednesday morning after the meeting, but the RBA can actually change the interest rates at any time, not just after the monthly board meeting.

There are four major banks in Australia, often referred to as “the big four”, National Australia Bank (NAB), WestPac (WBA), ANZ and the Commonwealth Bank (CBA).

 

These banks control about sixty percent of Australia’s wealth and they will raise their interest rates independently of RBA’s interest rate rulings from time to time.

 

Usually these independent interest rate rises are in response to some international financial market event, like the collapse of US sub-prime investments.

 

These banks keep some semblance of healthy market competition alive in Australia, and from time to time they will have interest rate wars which serve to stir up the economy and benefit the consumer.

 

There has been some conjecture recently about how much control the RBA has over the “big four” and the compulsory interest rate index, but essentially the Monetary Policy laws are still in place and the banks are not above our laws, even though it may appear that way at times.

 

Interest rates have been climbing along with inflation over the past few years and there are many predictions being forwarded about an economic recession hitting Australia in the near future. Most people with some understanding of our economic structure will tell you that we need another recession, and you can rest assured that a recession will bring a significant drop in loan interest rates, something that will bring sighs of relief from many Australian families.