What the Banks say

A research study published by the Geneva based Bank of International Settlements said central banks, including the Reserve Bank of Australia, should express their inflation objectives over a longer period, so they have the latitude to increase interest rates, even when inflation is low. 

Currently, the Reserve Bank of Australia operates under an agreement with the Federal Government that makes keeping inflation between 2 and 3 per cent (over the medium term) the primary benchmark for setting interest rates. 

The study argued that if central banks were forced to commit to keeping inflation low it could result in economic weakness, or even deflation.

Dr Lowe, who headed the study, believes central banks should focus on rapid credit growth instead of inflation. 

He said modifying policy would enable central banks to "lean against the build-up of financial imbalance", even when the short-term inflation prospects remained subdued. 

For home owners, any change in the policy of setting interest rates could see the Reserve Bank raise and lower interest rates more regularly and dramatically. 

Historically in Australia interest rates have risen and fallen in a continuing pattern which has generally lasted around seven years.

The main point in this interest rate cycle is that looking back over the last decade; peaks in interest rates have tended to last no more than around two years. 

So, if we accept the fact that interest rates are cyclical, by definition, all types of loans, whether for home ownerships, investment, variable, fixed for short periods or long periods, are based on this cycle.

When lenders set their rates they are taking into account their expectation of future events and interest rate movements.

In theory, this means (if the Banks get their calculations right), that all the different combinations of interest rates and terms should average out to be about the same over time.

That is not to say that interest rates don't matter. It’s wise to get the best deal you can every time you borrow.

For people who like the security of knowing what their mortgage repayments will be each month the lesson to be learned is to lock in rates for longer periods when they are low and for shorter periods when rates are high.

If predictability of payments isn’t so important to you, you might be happy to ride the interest rate roller coaster. Whatever you choose, make sure you have taken into account your unique financial circumstances. 

At present the basic variable rate loans from the major Banks average around 7.07 per cent while 3 year fixed rate loans for owner occupation and investment average around 6.95 per cent. 

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