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Who Sets Loan Interest Rates?

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Interest rates are based on decisions made by the Reserve Bank of Australia (RBA) on behalf of the Federal Government. The RBA meets every month to decide whether interest rates should be changed. Lenders then use these decisions as a basis for setting the interest rates for their individual loan products and will usually alter interest rates a day or two after any RBA announcement as we have seen plenty of late.

Generally, when the economy is in a trough (that's when unemployment is high and consumer spending is low) the RBA reduces interest rates to stimulate economic activity. The reverse is the case in a 'boom' situation and rates are increased to curb inflation which we are currently facing.

The biggest surprise of late to consumers and to the disappointment of the new government we have seen banks raise variable interest rates outside of the RBA announcements which caused much frustration and a financial burden to many home loan customers. The lenders have placed this down to the cost of money globally increasing due to the US credit crunch.

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