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How does a rate rise affect you?

When there is an official interest rise by the Reserve Bank, say 0.25 per cent, where does that 0.25 per cent actually go?

It’s a great question and so I better explain what the official cash rate (OCR) is. It is the rate that banks both pay and receive when they leave money with or take from the Big Bank.

It influences short-term interest rates, such as the 90-day bill rate and variable mortgages.

Short-term interest rates have a big impact on the overall level of economic activity in the country and therefore on inflation.

So as the OCR goes up, banks pay more on their balances at the bank and so they’ll want to charge more on their loans.

This is passed onto loans they make and eventually savers will expect to be paid more. The timing of how quickly loans and deposits are adjusted could mean banks make a short-term gain, but eventually the 0.25 per cent flows to borrowers who pay and savers who save.

By the way, when interest rates rise, the assumption is that economic activity will slow down, jobs could be lost and banks will do less business. That’s why share prices for banks can head south when interest rates rise, because the end-result will be lower profits.

Of course, the banks know how to shave points to improve their bottom line, but I don’t think the Reserve Bank and governments will ignore a cash rate exploitation trick for too long.

For advice you can trust book a complimentary first appointment with Switzer Financial Services today.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

 

Published on: Monday, February 01, 2010

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