Yesterday the Reserve bank hiked interest rates by 25 basic points to $ 3.75%. Within minutes Westpac announced it would hike mortgage interest rates by 45 basic points, nearly double this official rate. Similar action by the other banks seems inevitable.
The average person has a problem understanding interest rates. All they know is that when rates rise they have to increase their monthly payments on their house mortgage. Because of the recession, rates have been at an all time low during the past twelve months.
To put it simply, interest rates are the thing that controls the money supply.
Our present home mortgage was possible because we tapped into yesterdays money supply. New money is needed to service the demand for mortgages and other loans that will be required today - and on the world stage this country's interest rate regime determines if we get our share from the world money pool.
But - this is a two way street ! The people who have money to invest need to get a decent return. A lot of investment money comes from superannuation and savings and the owners need that income for day to day living. Low interest rates have forced many self funded retirees onto the old age pension.
The money the banks are offering on loans is money they have borrowed - and they claim the cost of borrowing is rising and they need more than that .25 basic points to keep the money flow viable. Of course, what is not stated is that they intend to maintain their profit margin - and increase it if possible.
In some countries interest rates are pegged by government decree. In Australia, market forces prevail - within the basic underlying structure set by the Reserve bank.
What you pay for the money you borrow will be determined by the deal you negotiate with the lender - and those that take the trouble to do their homework will find that it pays a dividend.
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