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  • Boss, I've got the latest figures in.

  • It's not good.

  • We've got low wage growth, slow retail sales, falling house prices.

  • It could be trouble for the economy.

  • What are we going to do?!

  • We could deploy...the weapon!

  • What's the weapon?

  • The interest rate.

  • Last week was a dramatic one for the Australian Reserve Bank.

  • It probably didn't go down quite like this...

  • Are you...are you sure, boss?

  • But its decision to lower Australia's interest rate did get a lot of people talking.

  • Now, I know what you're thinking.

  • Wait, what is an interest rate?

  • Well, let me explain.

  • You probably know a little bit already about loans, right?

  • They're the things that adults usually have to get when they buy a house.

  • Houses are super expensive, and people often don't have that sort of money just lying around, so they borrow it from the bank.

  • And not just houses.

  • You can also borrow money for cars or holidays or businesses.

  • But borrowing isn't free.

  • In exchange for letting you hold onto its money, the bank charges interest, which is a percentage of the loan.

  • It's up to banks to decide how much interest they charge and give customers, but they often base that decision on a special national interest rate, which is set by the Reserve Bank.

  • What's a reserve bank?

  • Do you even work here?!

  • The Reserve Bank is Australia's central bank.

  • It's not like other banks.

  • You can't go there to get a home loan or a savings account.

  • Its job is to make the big decisions about Australia's money, from what it looks like to how much of it gets printed.

  • It also sets the cash interest rate.

  • That's the interest rate that banks pay when they borrow money, and it's a powerful tool when it comes to managing Australia's money.

  • You see, interest rates have a big effect on the economy.

  • When they're low, people like your parents tend to have more money to spend on other stuff, and that helps businesses.

  • So, if things aren't doing so well, the RBA can lower interest rates.

  • Yeah. It's fantastic.

  • And if banks decide to pass on those lower rates, it can give the economy a boost.

  • Cool. Sounds like a plan.

  • Here. Let me do it. No!

  • Lowering interest rates is a big decision.

  • There can be serious consequences.

  • Lower interest rates can encourage people to take out loans they can't afford.

  • It can also lead to inflation, which is when Australia's money essentially becomes worth less because there's too much of it floating around.

  • In some cases, that's a good thing because it can make it easier to sell stuff overseas, but it has to be managed carefully.

  • And at the moment, there's another big problem.

  • They're already so low!

  • I know!

  • Yep. Right now, the basic rate is the lowest it's ever been.

  • Back in the '90s, it was about 17.5%.

  • But when the global economy took a dive in the late noughties, so did interest rates, and they've gone down heaps since then.

  • For the past three years, the RBA hasn't changed them, but last week it decided that it needed to roll out the interest rate weapon.

  • The trouble is, now Australia's interest rates can't actually get much lower.

  • What do we do if this doesn't work?

  • I don't know.

  • It means they only get to use this economic weapon a few more times, and that's got some people worried, especially because economists reckon there'll be more interest rate cuts by the end of the year.

  • While it's not a good sign for the economy, it is good news for borrowers, and many are hoping it's what Australia needs to get back on track.

Boss, I've got the latest figures in.

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A2 AU interest interest rate australia bank reserve weapon

Interest Rate Cut - Behind the News

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    Julia Kuo posted on 2019/07/30
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