Australia’s official cash rate is determined by the Reserve Bank of Australia in a board meeting every month (excluding January).
The RBA’s cash rate is the rate that’s charged on loans between financial institutions (like banks). It has a significant impact on the price of financial products you purchase.
Historically, a high RBA cash rate in Australia has resulted in high interest rates on things like:
- Car loans;
- Home loans;
- Personal loans;
- Savings accounts; and
- Term deposits
If you want to borrow money, a low cash rate is great. It results in low interest rates on these products. It’s not so good for savers, though!
When the RBA changes the cash rate, it has a knock-on effect across many parts of the country’s economy, including employment, inflation, investment and spending.
What is the official cash rate in Australia?
As things stand, Australia’s current cash rate is 0.85%.
Here’s a chart that displays the recent history of Australia’s cash rate. You can find this on the RBA website too.
What can affect the cash rate?
If the Australian economy is strong and high demand is pushing up the price of goods, the RBA may raise the cash rate to slow things down a little. This is done to ensure inflation stays within a healthy range.
But if the country’s economy is weak and demand is low, the RBA might lower its cash rate. This would encourage spending and investment and give the economy a much-needed boost.
But what does the RBA take into account to decide what changes should be made to the cash rate, if any?
- Economic growth: The RBA may lower the cash rate to bring back demand if economic growth is heading down (or has slowed). The flow-on effect of a lower cash rate is that people spend and borrow more with reduced incentive to save.
- Employment: Factors like employment and unemployment in the country are strong indicators of how well the economy performs. If unemployment is on the rise, the RBA could choose to lower interest rates. This would stimulate spending and investment and help to create new jobs.
- Inflation: The RBA has a flexible medium-term inflation goal of 2-3%. So while inflation is allowed to fall outside of this range, it’s meant to remain between 2% and 3% on average. Should inflation get too high, the RBA could decide to raise the cash rate. This gives Australians greater purchasing power.
- The international economy: It’s not just Australian conditions affecting deliberations. Strong growth overseas could create increased demand for products here in Australia.
How does the RBA change the cash rate target?
Every month (except January), the RBA board reviews the current cash rate, assesses the Australian economy’s state, and decides if it will hold, increase or decrease the cash rate.
Disclaimer: The cash rate isn’t the interest rate you pay on your home loan. When the cash rate goes up or down, banks and lenders can decide to pass on this change interest rate to your home loan.
How does the cash rate affect the interest rate I’m charged?
A cash rate helps a lender or bank set their interest rates for home, car and personal loans. The bank or lender will consider the cash rate and then decide if they will increase or decrease the interest rate they charge borrowers.
A home loan example: If the cash rate increases, a lender will likely also increase their home loans’ interest rates. If you had a fixed rate home loan, this change would not affect you. However, if you had a variable home loan, your lender’s changes to the interest rate will affect you. A lender can also change interest rates, even when the RBA doesn’t! These changes can happen at any time.