Flourish - eMag - Mar 25 - Flipbook - Page 18
WHAT’S
THE DEAL
WITH
INTEREST
RATES?
Often synonymous with economic
uncertainty and stress, interest rates have
become a major talking point across
Australia. And, in fact, the world. Designed
to potentially stall economic activity,
interest rates were hiked to slow spending,
and curb inflation. Here’s everything you
need to know about interest rates:
Firstly, what are interest rates? Interest
rates are the amount of interest added to a
loan by a lender (i.e. a bank). For example,
when you take out a mortgage, there’s
usually an associated interest rate, such as
2%. Put simply, interest is essentially the
amount of money you owe on top of the
amount you’ve borrowed.
Why do banks and lenders charge interest?
There’s a risk that the borrower may not be
able to repay their loan, so banks charge
interest to mitigate this risk. If assessed and
deemed less risky, your interest rate may
be lower. It’s also a way for banks and
lenders to generate profits.
Who controls interest rates? When
inflation is particularly out of hand, peak
bodies may impose interest rate increases
to bring it under control. In Australia, the
Reserve Bank of Australia monitors the
Australian economy and ensures prices are
stable and that there are enough jobs and
economic stability. The RBA is the body
that controls interest rates and can increase
or decrease them.
How do interest rates curb inflation? To
counteract inflation, governments and
bodies need to minimise spending. To do
so, they may increase interest rates to
make it more expensive to borrow money.
Ultimately, this can reduce spending and
demand for goods, which should stabilise
prices over time. However, there is a risk
this could trigger a recession (but that’s for
another article).
How do interest rate increases impact me?
When interest rates rise, we can all feel
anxious and financially burdened when our
monthly payments on debts and loans
surge. As a result, we have less money to
spend, which can impact our ability to
afford essential goods. Ultimately, this can
test our mental wellbeing and may cause
more people to report mental illnesses and
conditions.
