Why do banks decide to increase or decrease interest rates and who influences their decision? This article explains as simply as possible what drives interest rates and why they may be low for the foreseeable future.
The Reserve Bank of Australia (RBA) and the major trading banks may play the most visible role in setting interest rates, but in many cases they are being reactive rather than proactive.
A wide range of external factors feed into their decision-making process, including in no small part, our collective behaviour as investors and savers, borrowers and consumers. Then there’s the rate of inflation and wages growth, foreign currency exchange, the economic health of our trading partners, and the interest rates paid by local banks to borrow money from overseas.
Suddenly it’s not so easy to figure out where interest rates are headed, even in the short term.
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