Why Interest Rates Are Still At 1.5% And What This Means For You
Interest rates have been at the same rate since August 2016. Read about why this is the case and what this means for your business.
Interest rates can seem like a thing of magic, they move up and down through mysterious forces. Despite this, they impact us constantly and have a daily effect on how much interest we have to pay back. Read on to find out how the cash rate and interest rates interact and what this might entail for your business.
What are interest rates?
There are really only two things to think about it when it comes to interest rates. First is a thing called the cash rate. This is just the rate at which banks can borrow from the RBA, Australia’s central bank. So, when the RBA raises the cash rate it costs the banks more to borrow from the RBA. Therefore, the banks raise their rates which are called interest rates. As a result when the RBA announces that the cash rate is unchanged then it is generally safe to assume that interest rates should be unchanged. The RBA uses the cash rate to maintain the economy and to make sure the value of our money and prices of our goods which we buy don’t get out of hand (inflation).
Why are Interest rates still the same?
The trend for interest rates has been to keep them the same, as the RBA hasn’t changed the cash rate since August 2016. The reason we can assume for this is that the RBA has been trying to boost the Australian economy. The hope is that low-interest rates will incentivise individuals and businesses to borrow money and invest in new projects. In the latest RBA decision to keep rates the same, the reason for doing so was due to wages not rising enough while debt remains high for households. Likewise, the drought has made conditions hard for the farmers. By increasing the rates the RBA would put more strain on households with large debt and farmers with debt and interest to pay. Therefore, they left the rates unchanged.
How to keep up to date
The decision for the cash rate is on the first Tuesday of each month. Consequently, the next decision is just around the corner. You can also read the minutes of the decision which is found under media release.
What does this mean for me?
As interest rates are currently low, it means loans will be ideally easier to obtain and maintain. The RBA has so far continued its current trend of low-interest rates since 2015 which for small businesses means less money redirected towards paying off interest. This money could be used to take out a loan for a small redevelopment, marketing campaign or implementation of new products. An option to also consider when approaching loans is whether to take out a variable or fixed interest loan. This all depends on whether you think interest rates are likely to increase. The safest bet you might find is fixed as the rates are already very low. At the end of the day, it’s very hard to predict whether the RBA will increase the rates but again historically when they have changed rates it has been a slow gradual process.
You may find that your business is currently operating well and steady but you are looking to increase production. In that case, whether you decide to go ahead now or wait until the next decision on November 6th you could consider expanding your workforce. This may be done either through small part-time contracts or through engaging a consultant .
Have more questions? Contact a LawPath consultant on 1800 529 728 to learn more about customising legal documents and obtaining a fixed-fee quote from Australia’s largest legal marketplace.
Justin is a legal intern at Lawpath as part of the content team. He is currently studying a Bachelor of Laws and a Bachelor of Economics at UTS.