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Reasons Why Mortgage Finance rates rise and fall
The Reserve Bank and its counterparts the world over
use short-term variable interest rates to slow down
or speed up the economy and control inflation. If these
rates remain too low for too long, the rate of spending
and borrowing can outstrip the economy's productive
potential. The result is rising inflation and the risk
of an overheated economy.
 Why
only small rate movements are expected in the future
Through the 1970's until late 1990's the economy went
through many boom and bust cycles. They were characterised
by rapid inflation, followed by rapid interest rate
rises, followed by recession. During these cycles the
market would peak and the economy would falter and inflation
that had accompanied economic growth abated. During
economic recessions the Reserve Bank reduced interest
rates to stimulate the economy.
In summary the case for and against a rate rise
For:
- The Reserve Bank still believes household borrowing
(mortgages, credit cards, car loans) is increasing
at an unsustainable rate.
- Inflation pressures, particularly higher oil (energy)
prices, rising wages and retail spending.
- Interest rates are rising around the world.
Against:
- Underlying inflation is still low (2 per cent)
- Real growth in wages is arising from increased productivity
and hence not increasing inflation
- The housing market and lending for investment properties
is slowing
- Economic growth is forecast to slow
- Some parts of Australia are still drought affected.
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