Cash Rate Decisions By Reserve Bank Influence Lending Rates

Investing in “bricks and mortar” has for many years been the pathway to financial independence for thousands of Australians. Our real estate market has performed well overall, and our taxation system provides additional incentives that make owning investment properties attractive.

Low Interest Rates Not the Whole Story

One of the drivers of the growth in this sector of the market has been our historically low interest rates. These provided the impetus for a sustained building surge, especially for new apartments close to the CBD. However, low interest rates are not the whole story when it comes to selecting properties that will provide the best return.

The selection process is not something that prospective investors should undertake without some professional assistance. This is where we come in. At Fountain Property Group we have high quality residential real estate suitable for people who want to build wealth through property.

A Quick Lesson on Monetary Policy

We have seen that low interest rates encourage investors into the property market. We also believe that people should go into these ventures with some understanding of the other factors that may affect market returns. Government monetary policy has a big influence on investor confidence, and understanding the cash rate is the key to understanding the movement of interest rates.

Our Reserve Bank, which operates independent of government, has three key responsibilities. They are to contribute to the stability of the currency, full employment and the economic prosperity and welfare of the Australian people. Having a stable financial system is fundamental to promote economic growth, and setting the cash rate is one of the tools the Reserve Bank uses to achieve this aim.

Cash Rate – a Definition

The cash rate is defined as the overnight money market interest rate. Decisions to change this rate are made by the Reserve Bank Board members who meet monthly and make these decisions based on a range of other economic data.

From a high of 17.5% in January 1990 to a low of 5% in August 1995, the cash rate remained relatively stable until it dropped to 3% in May 2009 in response to the GFC (Global Financial Crisis). Apart from a few minor corrections, the cash rate again hit 3% in December 2012 and has remained below that since. It currently sits at 1.75% with any adjustment made being in the order of -0.25% percentage points.

No Dramatic Changes Expected

The absence of unexpected fluctuations in the cash rate has given investors some certainty when making decisions about entering the property market. This does not mean that interest rates will not rise given the right circumstances, but as the cash rate has been stable for some time, the market is not expecting any dramatic changes any time soon.

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