Why do interest rates change?

The following is general information and not financial advice or recommendation to take any action. 

Interest rates influence nearly every corner of the economy - from home loans and savings accounts to investment markets and business activity.

Over the past few years in Australia, we've seen them rise to 4.35%, and now - maybe, they are on their way back down.

Why do they change? And who decides?

What drives interest rates?

Interest rates are the cost of borrowing money, or the return you earn for lending it. In everyday terms:

• On a mortgage, the interest rate determines the interest cost of your repayments.
• If you have funds in deposit or fixed income products, the interest rate influences your expected return. 

At the centre of it all is the cash rate, set by the Reserve Bank of Australia (RBA).  

This is the benchmark rate banks use when lending to each other. But it also acts as a reference point for almost all other rates in the economy, from variable mortgages to term deposits and credit card charges.

Why do interest rates rise?

The RBA typically raises interest rates when it wants to slow the economy down. This happens when:

• Inflation is running too high
• Household spending is strong
• The economy is at risk of overheating.

Higher rates make borrowing more expensive and saving more rewarding. That reduces spending, eases inflationary pressure, and helps bring growth back to a more sustainable level.

You’ve likely seen this play out in recent years, with rapid rate increases aimed at curbing inflation following pandemic-era stimulus from governments around the world.

Why do rates fall?

On the flip side, the RBA cuts interest rates to stimulate the economy. This generally happens when:

• Inflation is low or falling
• Growth is weak
• Confidence among businesses and households is subdued.

Lower rates reduce the cost of borrowing and encourage spending, investment, and hiring. It’s a lever the central bank uses to reignite momentum when the economy needs support.

This is what we're seeing play out in 2025, with inflation coming back under control the Central Bank is reducing interest rates to encourage spending, and growth to return to more normal levels.

What it means for savers 

Interest rate movements can reshape the investment and saving landscape:

When rates rise:

• Mortgage repayments increase
• Share markets often become more volatile
• Fixed-income products may offer higher returns, especially on new terms.

When rates fall:

• Borrowing becomes cheaper
• Cash and savings accounts at banks earn less
• Investors often seek alternatives, like Earnr's products, for more dependable returns.

How Earnr fits in

Earnr’s products are built to offer consistent, defined returns, regardless of where rates are heading.

While our target returns reflect prevailing market conditions, our deep expertise in credit and financial markets helps to ensure we can continue to offer consistently strong returns and provide stability even when markets are uncertain.

For investors who value clarity, capital preservation, and predictable outcomes, this can offer a welcome alternative to volatility and guesswork.

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‍The information in this article is intended to be factual though may also contain the opinion of the author. Whilst every effort has been made to ensure accuracy, we take no responsibility for any errors or omissions. Any opinions are those of the author alone and not a recommendation to take any action or obtain any product. You should consider whether this information is appropriate for you, and seek professional advice before making any decisions.