Impact of Low-Interest Rates from Australian Reserve Bank
It's no more news that things are hard. Yes, everyone is looking for a bonus and hoping to bounce back to normal.
Well, the good news is that we now have a bonus from the government. Recently, the Australian Reserve Bank announced a record cut in official interest rate to a meagre 0.5%.
This is one of many efforts in a bid to ensure the ship of the Australian economy doesn't sink. However, this action is not without numerous impacts. Like usual, we have had our experts explain what the consequences are, and here you have it.
Low Interest, More Loans
First, with this new action, loans will take upon meagre interest, and this will significantly motivate more Australians to apply for loans to complete projects without financial drawbacks.
Rise In Investment
This might be an excellent time for private investors to put money to use. Since low-interest-rate boosts stocks and purchasing power, private investors will be more open to investing and getting more returns later on.
The effect of this meagre interest on owners of credit cards with a variable rate is angelic. Credit card users will now enjoy low-interest charges upon every use of their cards. However, low-interest credit cards users with a fixed rate will not benefit from this development.
Depreciation Of Exchange Rate Value
As an aftermath, the Australian dollar value will depreciate in the exchange market. Since it is now very unattractive to save money in Australia, the Australian dollar will automatically be in less demand leading to an ultimate fall in value. A plus for the economy.
Lower Returns On Savings
For the segment of the population that is prone to saving for the rainy day, this new development may be an excellent turn-off for them. Because there will be a lower return due to the low-interest rate, it may not be wise to save at this point.
Increase In Consumer Spending
Due to the low-interest rate, no one wants to save without getting good returns. The alternative is to buy assets with commendable value. This would increase consumer spending since keeping is no longer attractive.
Reduction In Mortgage Payment
With the new 0.6 decreased interest rate, it means there would be a slight reduction in the monthly cost of mortgage repayments. As a result, the mortgagor would have more income to put to other personal use.
Decline In Lending
Due to this new cut, commercial banks may be unwilling to lend to the mammoth of a crowd who will now be eager to borrow and benefit from the low-interest rate. This reluctance stems from the fact that banks would also need a higher deposit to cope.
On the downside, however, this low interest may open the doors for excessive borrowing. Since excessive borrowing caused by low-interest increases money in circulation, Australia might enter a recession. If this happens, it is very grave for many social and economic development, because, among other things, market supply will lose its value.
Loss Of Confidence
Many times when the government make official announcements like this, the population loses faith. This announcement may have much instilled in the consciousness of the people that the government may not be in control any longer.
The decision of the Australian Reserve Bank to maintain the historic 0.5% interest rate, is not near perfect. Nonetheless, it is one of the best strategies that can be adopted to ease the burden of the populace at this point of health emergency and economic downturn.