Aaron Bell
Mary Flory
The cash rate, also known as the RBA cash rate or cash rate target, is Australia’s official interest rate. Every month, with the exception of January, the Reserve Bank of Australia (RBA) meets and decides whether the rate should be raised, lowered or remain the same.
The official rate represents the interest charged on loans between banks and financial institutions. When the RBA sets the rate, it acts as a benchmark for banks and lenders to use when setting interest rates on their financial products. So, it has a large influence on the cost of home loans, personal loans, savings accounts, term deposits and more.
Since 2020, the cash rate has been as low as 0.10% and as high as 4.35%. A high rate typically means higher interest rates for loans, while a low one typically means lower interest rates.
How is the target determined?
Australia’s central bank, the RBA, is in charge of making monetary policy and maintaining strength in Australia’s financial systems. The RBA has three key focuses:
- Contributing to the stability of the currency
- The maintenance of full employment
- The economic prosperity and welfare of Australians.
The RBA sets the cash rate at their monthly meeting. To make that decision, they consider a range of economic factors, such as inflation, the unemployment rate and economic growth.
How does it differ from the interest charged on a loan?
The cash rate is different from the amount of interest a bank charges its customers. The cash rate is a benchmark, and a bank or lender uses it to decide how much interest they’ll charge customers on home loans, personal loans and commercial loans.
However, banks do not mirror the target identically but move their rates up and down in line with it. So, the interest rate from your bank may not be identical to what the RBA set.
In Australia, it is common for banks and lenders to ‘pass on’ RBA changes to their customers but not always in full, which usually leads to harsh criticism.
If you have a mortgage, changes to the cash rate can directly impact your monthly repayments, depending on your type of home loan, which will be either fixed or variable rate.
If you have a variable home loan, your mortgage repayments will go up and down with the market. So, you’ll have to pay more with a higher rate and less if it comes down, sending interest rates down with it.
If you have a fixed home loan, however, you lock in the interest rate for a set period of time. If the RBA increases the cash rate along with your lender, your monthly repayments stay the same, which could save you money. Regardless, if the RBA lowers the cash rate and your lender follows, you will still pay the rate you locked in.
How does the cash rate directly affect consumers?
It’s important to understand how the cash rate impacts you as a consumer. If you are considering borrowing money or opening a savings account, you will need to factor in the current target and the interest rates of financial institutions.
Each month, banks, economists and financial experts try to anticipate what the RBA will do, knowing how changes to the rate can influence consumers. When it comes to mortgages, even a small dip in interest rates can help you save thousands of dollars over the term of the loan.
These spending and savings fluctuations are all influenced by the cash rate, reinforcing how important it is to the overall economy. Of course, when it comes to big financial commitments such as a mortgage or car loan, there are many factors that influence your decision. And, it may not be possible to time the start of your loan with a period of lower interest rates. However, it is important to consider the state of the economy before taking on any long-term financial commitment.
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