RBA Cash Rate in Australia Explained

Whether you’re looking to purchase a new home or open a savings account, then the cash rate is definitely something you should be aware of. The cash rate is a significant benchmark that affects those with mortgages and savings accounts.

So, if you want to learn more about the cash rate, how it works and how it might affect you, here’s the RBA cash rate in Australia explained.

What is the cash rate and how does it affect you?

To understand what the cash rate is, you first need to understand ‘overnight’ funds. Overnight funds are the funds that banks lend to one another on an overnight basis to satisfy the daily cash needs. The market interest rate on ‘overnight’ funds is reflected in the cash rate.

 Essentially, what the cash rate represents is the market interest rate on these funds that are lent from bank to bank. The cash rate is a numerical value that can be changed by the RBA in order to keep the inflation rate between 2% to 3%.

The cash rate is more than just a metric for banks. The cash rate acts as a significant metric for savings accounts and mortgages, as well as the exchange rate for the economy. Meaning that the cash rate not only affects banks, savings account holders and Australians with mortgages, but it also affects the economy as a whole.

Australians everywhere are affected by the cash rate, regardless of whether or not they have a mortgage or savings account. But for those with mortgages and savings accounts, paying attention to the cash rate can help you make smarter financial decisions.

What is the RBA and what does it do?

The Reserve Bank of Australia (RBA) controls the cash rate. When the RBA makes changes to the cash rate, it can have a domino effect on different sectors of the economy. Areas such as investment, employment, spending and inflation can all be affected by the RBA cash rate.

The RBA is an autonomous central bank, overseeing the Australian dollar. Established in 1934, the RBA provides monetary policy support for the economy in Australia. The RBA’s purpose and goal is to maintain the stability of the Australian dollar, protect the economic well-being of Australians and create jobs for Australians.

In order to do this, the RBA has to make sure there is sufficient money. This is accomplished through their ability to set interest rates on savings accounts and money lending.

So essentially, the RBA is able to control the cash rate in an effort to positively impact the economy. For example, if the economy is doing well and there is high demand increasing the price of goods, the RBA may raise the cash rate in order to slow things down and keep inflation at a healthy level. 

On the other side of the coin, if the economy isn’t super strong and demand is low, the RBA has the power to lower the cash rate in an effort to encourage Australians to spend and invest, therefore giving the economy a much needed boost.

How often does the RBA change the cash rate?

The RBA meets on the first Tuesday of each month – except during January – to determine cash rate. During this meeting they look at the current economic conditions to determine whether the official cash rate should be increased, decreased, or remain the same. The final decision is always announced at 2:30pm on the day of the meeting. Any changes made to the cash rate take effect the following day.

So to answer the question, how often does the cash rate in Australia change? The answer is that it can change once a month. But the RBA will not necessarily change the cash rate each month. It’s only if a cash rate change is deemed necessary by the RBA during that meeting that the cash rate will change.

The RBA sets these cash rates independently, which means that they won’t depend on any information from banks or financial institutions when making the decision to change the cash rate. The RBA bases the cash rate decision on how much money it may lend out at any given time.

How does the cash rate affect interest rates?

Interest rates for both home loans (mortgages) and savings accounts are affected by the cash rate. As the cash rate goes up, so do interest rates. And as the cash rate goes down, so will interest rates.

This is an interesting thing to take into consideration for Australians with both a home loan and a savings account, as the change in interest rates will have an opposite effect in both scenarios. For home loans, an increase in interest rates will mean a higher monthly payment. But for savings accounts, a higher interest rate results in a higher return on savings accrued through interest.

How does the cash rate affect home loans?

For Australians seeking a home loan – also known as a mortgage – the cash rate plays a significant role. It’s important that anyone seeking a home loan pays attention to the cash rate.

Banks set variable home loan interest rates in accordance with the cash rate. This means that the increase or decrease of home loan interest flows through mortgage providers. However, before deciding on home loan interest rates, banks may consider their operating costs, such as staff, marketing, branches and interest paid to savers.

Since interest rates for home loans are based off of the cash rate, the cash rate can have a significant effect on how much homeowners are paying for their mortgage.

For example, a small interest rate decrease can make a large difference in the monthly repayment cost for mortgages. Therefore, a reduction in interest rates may attract more homeowners to seek home loans in order to purchase a property. The interest rate reduction can attract borrowers to seek a home loan to purchase a property.

On the other hand, a higher interest rate will result in a much larger monthly repayment for the mortgage. Since the interest rate can make such a difference in the monthly repayment amount for mortgages, it’s important that those seeking home loans pay attention to what the cash rate is – as this is what affects interest rates for home loans in Australia.

How does the cash rate affect property prices?

The cash rate doesn’t just affect mortgages, it can also affect property prices. Which is why it is important for Australians looking to buy a home to pay attention to cash rate.

The reason that cash rate can affect property prices is because it affects mortgage interest rates. When the interest rate is lower on mortgages, obtaining a mortgage may be much more attractive for people. Thus creating a rush towards the property market. This property market rush can drive up prices significantly.

On the other hand, high interest rates can drive the overall property market prices down. This is because when the cost of borrowing goes up, less people are interested in buying a home. This decrease in demand for the property market drives prices down.

How does the cash rate affect savings accounts?

Savings accounts are another thing that align with the cash rate. So when the cash rate goes up, savings account holders will see a better return on their savings during this time. Similarly, as the cash rate goes down, so does the return on money in the savings account.

Cash rate affects savings accounts because the goal is that as the cash rate goes up, people will save more and spend less. Though an individual’s personal circumstances will be the biggest factor in how people choose to save or spend at the end of the day. On the other side of things, if the cash rate goes down, interest rates on deposits will also go down.

Final thoughts

The bottom line is that the cash rate affects a wide variety of sectors in the economy. The cash rate specifically plays a significant role for both Australians taking out home loans and savings account holders, as well as the Australian economy as a whole.

With all of this being said, the cash rate can be unpredictable, a change in cash rate can affect property prices, interest rates for mortgages and interest on savings accounts. Being aware of this will help you make the best possible financial decision for your individual circumstances. If you have any questions or in need of any assistance in buying your first home, book your first home strategy call with one of our expert team members and let us guide you in your home buying journey.