Introduction

Rising and falling interest rates can have a significant effect on both the Australian economy as a whole and on the
everyday lives of individual consumers and families. In general, rising interest rates are not welcomed by average
Australians. Rising interest rates are generally good for those who are looking to invest or people living on a fixed
income, but for the vast majority of people who are paying off houses or credit cards, a rise in interest rates is not
good news.

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The impact of the rise and fall of interest rates

The rise and fall of interest rates has a huge influence on the whole economy. The official interest rate level set by
the Reserve Bank of Australia directly affects the interest rates that banks and other financial institutions need to
charge on the money they lend out. As we have seen, this includes financial arrangements entered into by people
everyday, such as credit cards, mortgages and business and personal loans. The effect of rising and falling interest
rates also flows on to how much consumption is carried on by individual consumers and businesses. This, in turn,
can have an effect on inflation levels as well as an impact on the value of the Australian dollar, which affects the
cost of imports and the value of exports. The potential chain reaction effect of interest rate fluctuations means that
the RBA must carefully consider the timing and scale of any changes to official interest rates.

Short-term interest rates

Rates are in general much less volatile now than they were a few decades ago. The last peak in short-term interest
rates was in 1989, when they went over 18 percent. Since then, the rate has steadily declined (with a few rises
along the way) to a low of 4.25 percent in 2002. After this, the rate rose again to above 5 percent. Rises usually
occur at a rate of a quarter of a percentage point each time.

Like its counterparts in countries around the world, the Reserve Bank uses short-term variable interest rates to slow
down or speed up the economy and control inflation. If interest rates remained too low for too long, people may
borrow and spend more than the economy can productively provide. The result of this would be a rise in inflation
and an overstretched economy.

Interest rate cycles

The Australian economy used to be more volatile. From the 1970s until late 1990s the economy went through many
boom and bust cycles. These cycles resulted in rapid inflation, which was followed by rapid interest rate rises (to try
to control the inflation), which were then followed by periods of recession. During these recession periods, the
Reserve Bank would reduce interest rates to stimulate the economy.

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Since around 2000, interest rates have been much steadier and remained comparatively low. This is because the
Australian economy has been increasing in productivity - which is to say, is managing to grow without raising
inflation. This is a change from the previous 30 years of boom and bust, and some believe that the factors which
caused that cycle have, for the time being, been brought under control.

It is very hard to predict which direction official interest rates will go in the future. Some people feel that what is
called household borrowing (mortgages, credit cards, car loans) is increasing at an unsustainable rate. There are
also indicators that point to potential inflation, such as higher oil and energy prices, the rise in wage rates, and the
increasing level of retail spending. It can also be seen, however, that if inflation and housing loans are kept in
check, and the growth in wages comes from proper economic productivity, then interest rates may not need to be
increased in any dramatic fashion.

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Introduction

- What is interest rate

- Basic Overview

First Section

- Interest Rates all time low (refer to statement Turnbull)

- Reserve Bank official rates are at record lows at 1.5% as of 2 August 2017 (Investopedia)
- Any lower would cause massive increases in investment and spending
- low mortgage repayments
- How it affects loans
o Credit card
o Mortgages
o Business
o Personal
- Cost of government interest payments increase
o May lead to higher taxation
- Reduced Business and Consumer confidence

Second Section

- The statement Turnbull

- Huge spending, more attractive to buy assets, rise in house prices but ultimately cause increased
inflation rates
- Government is trying to curb the booming housing market as of currently so no reason to further
reduce interest rates
- How it affects consumption
o Consumers more inclined to save
Compare 2015 When interest rates were 2.5% and household saving ratio was
around 8 (ratio of savings to disposable from income) and 2017 where interest rate
is 1.5% and saving ration is approx. 5 (TradingEconomics, RBA)
o High interest rates, less disposable income, economy slows, inflation rates decrease
Compare 2015 inflation rate approx. 1.5% whereas now 2017 during period of low
interest rate inflation rate approx. 2%
- Overall fall in consumption and investment

Third Section

- How it affects Australian dollar, high interest rates more attractive to foreign investment
o Although market stability is a significant factor
o Makes Australian dollar more worthy
During 2012 when interest rates were approximately 3.5% aussie dollar was >$1
USD, Now in 2017 with 1.5% interest rate aussie dollar is around 75 cents
o More imports and less exports
Exports are made less competitive because the same price is more expensive for
other countries
Imports are made more competitive because purchasing power of dollar is increased

Conclusion

- Reassert
https://tradingeconomics.com/australia/inflation-cpi

https://tradingeconomics.com/australia/personal-savings

http://www.economicshelp.org/blog/3417/interest-rates/effect-of-lower-interest-rates/

http://www.xe.com/currencycharts/?from=AUD&to=USD&view=5Y

http://www.x-rates.com/average/?from=AUD&to=USD&amount=1&year=2012

http://www.rba.gov.au/statistics/cash-rate/

http://www.economicshelp.org/macroeconomics/monetary-policy/effect-raising-interest-rates/

http://www.investopedia.com/articles/investing/100813/interesting-facts-about-imports-and-exports.asp

http://www.investopedia.com/ask/answers/040315/how-do-changes-national-interest-rates-affect-
currencys-value-and-exchange-rate.asp

http://www.investopedia.com/ask/answers/12/inflation-interest-rate-relationship.asp

http://www.skwirk.com/p-c_s-58_u-486_t-1324_c-5096/the-effect-of-rising-and-falling-interest-
rates/qld/sose-economy-and-society/our-economy/economic-change-part-two

http://www.investopedia.com/ask/answers/071715/how-do-changes-interest-rates-affect-spending-habits-
economy.asp

http://www.investopedia.com/terms/m/marginal-propensity-invest.asp