What Are the 4 Factors that Influence Interest Rates?

Several factors influence interest rates at any given moment. The Reserve Bank of Australia works to stabilise the rates. However, some events are out of their control. Thus, Australia has experienced severe fluctuations in the past. The following are four factors that influence interest rates.

Inflation

Inflation occurs when the price of goods and services increases. It causes the value of your money to decrease. The prices of goods and services increase when the price of raw materials increases. Inflation is a sign that the economy is overheating.

To control inflation, the RBA will increase interest rates. It discourages borrowing so that prices can fall back down. 

Unemployment

If unemployment increases, it’s a sign that employers can’t afford workers. It depresses the economy. Consumers don’t have the funds to spend on goods and services. 

High unemployment causes the RBA to lower interest rates.

Wage Growth

Wage growth is good for the economy. It allows consumers to spend more on goods and services. If wages are growing, it could signal upcoming inflation. The RBA usually stays pact before cutting or increasing interest rates.

Household Debt

High household debt leads to concerns for the economy. If the RBA raises interest rates, households faltering on the obligations is imminent. Thus, the RBA usually waits in this situation too. If they decrease rates, it allows households to refinance home loan. A plus for consumers.

Factors that Influence Interest Rates Conclusion

Knowing the factors that influence interest rates helps you understand your loan terms. In addition, it helps you improve your financial circumstances.