Interest Rates, how do we compare?

At we take a look at what makes interest rates move, and how our rates compare to the rest of the globe.
The Reserve Bank of Australia will meet next week to determine its interest rate decision. The bank is likely to keep the official cash rate at its current 7.25 per cent, but economists haven't ruled out a movement either way.

The economy is slowing which does point to the RBA holding rates, but inflation is higher than the bank's target of 2-3%.
Why do rates move?

Central banks use interest rates as a measure to keep the economy on track. A major factor in their decision is keeping inflation, which is the rate of prices rises, under control. Central banks have to keep inflation within a target range. This is done to promote steady economic growth, and to avoid boom and bust cycles. High inflation is often an indication that the economy is growing rapidly, while low inflation indicates a sluggish economy.
Raising interest rates will generally slow spending as people have to direct more of their finances into higher mortgage payments. Cutting rates has the opposite effect, allowing people to spend more and stimulating the economy.

While important, inflation is not the only thing central banks have to worry about. They also need to look at the overall economic picture. Aspects such as business and consumer confidence levels, retail spending, the number of buildings being constructed, unemployment rates, job vacancies, and their stable and positive levels point to the health of the economy.

What central banks aim to avoid is stagflation. This is when an economy has to battle high inflation with a slowing economy and rising unemployment.

So which countries are doing what?

The rate-cutters


The US Federal Reserve has cut their rates seven times since September last year in an effort to stimulate the country's flagging economy.
The US economy has been on the brink of recession this year, due to a share market meltdown in January as well as the credit crisis instigated by lenders losing billions of dollars on bad loans.


The Bank of England has cut its interest rates three times since December. The latest 25 basis point drop made in April cut the rate to 5 per cent.
The cut came despite the 2.5 per cent inflation rate breaching the bank's 2 per cent target. The BOE said broader concerns about the slowing economy were the reason for the cut.
The rate-holders


The European Central Bank has kept interest rates at 4 per cent since June 2007. This is despite the region's 3.2 per cent inflation rate being outside its target band of 2 per cent and is at its highest levels since the euro was launched in 1999.


At 8.25 per cent, New Zealand's interest rates are the second highest in the developed world (behind Iceland).
The Reserve Bank of New Zealand has not moved their rates since July last year, this is after several years of regular rises. New Zealand's inflation rate of 3.4 per cent is outside the central bank's target of 1 to 3 per cent.


Japan's central bank has left it interest rates unchanged at 0.5 per cent when it met at the end of last month.
Japan has had the opposite problem in comparison to many other economies in recent times, battling deflation rather than inflation. Deflation is a sustained decrease in prices. It's seen as a negative for an economy. Japan is now back in the growth zone, with the current 1.2 per cent inflation rate the highest it has been in a decade.

The rate-hiker


Iceland's 15.5 per cent official interest rate is the result of massive rate hikes - one of 1.25 per cent which was made at an emergency meeting in March in an effort to tame inflation.

The country's running at 8.7 per cent inflation, well above the target of 2.5%

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Published on May 5-nd, 2008 in Insurance
Damon Rasheed is the CEO of Rate Detective, an Australian financial service comparison sites specialising in Life Insurance, Income Protection Insurance and home loans. Damon holds a Master's Degree in Economics from the University of Melbourne and has been involved in many start-up internet businesses.

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