There is a difference between the prevailing rates of interest in the money and credit markets and what can be loosely called the natural rate of interest. When the rates diverge, problems emerge.
The central bank in Australia (the RBA) conducts the management of monetary policy, independently of the Government of the day but to a stated aim of constraining inflation between 2% – 3%pa. It has just manipulated down market interest rates twice in two months. Prior to that, the official cash rate (the benchmark the RBA uses to influence all other rates) was held ‘at emergency low levels’ for 3 years. If the old rates were at emergency levels, then what are they now being lower still? The official cash rate is now 1%pa.Continue reading