Territory Loans

Interest Rate Cuts December 2011

7th December 2011

The Reserve Bank has met for the final time this year and the verdict is an interest rate cut by 25 basis points. This may be due to the Reserve Bank not scheduled to meet in January to discuss rates, unless a special monetary meeting is called. A second rate cut, after last month's announced cuts may also be due to the uncertainty of the European economy. The Reserve Bank has perhaps pre-empted the continued down turn in their economy and is therefore, beginning to shield the Australian economy from any potential fall-out.

So a reduction of 25 basis points. What does that mean? For those who don't understand basis points, here is an explanation from investopedia.com:

"A basis point is a unit of measure used in finance to describe a percentage change to the value or rate of a financial instrument. One basis point is equivalent to 0.01% (1/100th of a percent) or 0.0001 in decimal form. In most cases it refers to changes in interest rates and bond yields."

So a reduction of 25 basis points means a reduction of 0.25% or a quarter of one percent. You may only be concerned with fluctuating interest rates if you have a variable rate home loan. Those with fixed interest loans generally float above the highs and lows of interest rate changes and may only be concerned if the fixed interest period on their loan is drawing to a close.

It now remains to be seen if the banks will pass on the full 0.25% reduction. Even if they only pass on a portion of the rate cut, it's still a positive announcement. By continuing to make the repayments you're currently paying, you'll be paying a little bit extra off the balance of you're loan, and every extra repayment, not matter how big or small will reduce the life of your loan.

Perhaps the interest rate cut will reduce a little of the stress you may be feeling at the moment, with one less thing to worry about, now that the Festive Season is upon us.