Basic economic theory – interest rates
The theoretical interest rate story goes something like this… Lower interest rates encourage additional investment spending, which gives the economy a boost in times of slow economic growth. In Australia, the RBA is responsible for Australia’s monetary policy, which involves setting the interest rate on overnight loans in the money market (‘the cash rate’). The cash rate influences other interest rates in the economy, affecting the behaviour of borrowers and lenders, economic activity and ultimately the rate of inflation. Changes in interest rates affect the public’s demand for goods and services and, thus, aggregate investment spending. A decrease in interest rates lowers the cost of borrowing, which encourages businesses to increase investment spending. Lower interest rates also give banks more incentive to lend to businesses and households, allowing them to spend more. Over the last couple of weeks I have had client situations that have both proven and disproven the...