Banks and other financial institutions mainly depend on their interest income for their revenue. Banks get interest through loans they provide to a borrower. In turn, banks pay interest to depositors depositing a certain amount of money in banks. Normally, interest rate refers to the rate offered by a country’s central bank towards the deposits. The effective interest rate is a measure that includes all interest payments and investment capital. Interest rate acts as the major factor in determining a country’s income.

The interest rates are influenced by some of the economic factors including stock markets conditions, currency, and inflation etc. Inflation causes a rise in goods and services of various products. Besides, labor market is one of the key factors that influence inflation. In February 2009, the Reserve Bank of Australia, or RBA, lowered its interest rate by about 100 basis points to 3.25%. This rate cut reflected the lowest rate in the last seven years.

Interest rate cut is one of the options for lowering a country’s inflation. Australia’s quarterly inflation rate between October 2008 and December 2008 is 3.7%. However, the Australian Government expected the inflation rate to be somewhere around 2% to 3%. In March 2009, RBA maintained it interest rate at 3.25%. This caused a sink in Australian Dollar value against the US Dollar value. However, the reserve bank said that an economy stimulus package is already under consideration.

The economic downturn in some countries like US has affected the growth rate of Australia. In the US, the Federal Reserve has lowered its interest rates several times in order to boost the economic conditions. The interest rate factor can directly affects millions of people living in a country. Lower interest rates means that a country needs capital to boost its economy. If the interest rate gets lower, variable interest rate borrower has the advantage of repaying lower interest amount for loans they have borrowed. On the other hand, if interest rate rises, variable rate mortgagors should repay a higher interest amount. » Read More