What is the Reserve Bank of Australia and what does it do?

The Reserve Bank of Australia (RBA) is Australia's central bank. Part of its role involves setting Australia’s monetary policy, which can make a significant impact on the cost of loans, as well as your ability to grow your savings.

What exactly is the Reserve Bank of Australia?

In the RBA’s own words:

“The Reserve Bank of Australia (RBA) is Australia's central bank and derives its functions and powers from the Reserve Bank Act 1959. Its duty is to contribute to the stability of the currency, full employment, and the economic prosperity and welfare of the Australian people. It does this by conducting monetary policy to meet an agreed medium-term inflation target, working to maintain a strong financial system and efficient payments system, and issuing the nation's banknotes. The RBA provides certain banking services as required to the Australian Government and its agencies, and to a number of overseas central banks and official institutions. Additionally, it manages Australia's gold and foreign exchange reserves.”

What does the RBA mean to everyday Australians? 

The RBA is involved every time you spend cash, as one of its roles is to manage the nation’s currency supply. Look closely at a banknote the next time you use one – you’ll find the RBA governor’s signature.

The RBA also sets the national cash rate – the interest rate that banks charge one another on the overnight loans they use to access the cash required to provide financial services. The RBA board meets 11 times a year – every month except January – to decide whether to raise the cash rate, lower it, or keep it on hold.

Because the cash rate affects the cost of bank funding, changes to the cash rate can in turn lead to changes in the cost of financial products and services.

You can find the current RBA cash rate on RateCity, as well as more information on which banks and lenders have passed on the most recent changes to their customers.

The RBA cash rate and loans

The national cash rate can serve as an effective benchmark for the interest rates that banks and other lenders charge on home loans, personal loans, and car loans. Generally, when the cash rate is low, interest rates will also trend low, making it cheaper to borrow money. But if the cash rate is high, lenders will likely charge high interest rates, making it more expensive to borrow money.

When the RBA changes the cash rate following its monthly meeting, most banks and other lenders will pass on these changes through their interest rates.

For example, if you have a home loan on a variable interest rate and the RBA cuts the cash rate, your bank may lower the variable rate on your home loan. This could allow you to pay less interest on each monthly repayment, freeing up some room in your household budget, or you could keep making the same repayments and make progress towards paying off your property faster, potentially saving on total interest charges over the longer term.

But if the RBA raised the cash rate, your lender may raise your home loan interest rate accordingly. This would raise the cost of your monthly repayments, potentially putting stress on your household budget.

The RBA cash rate and savings

The national cash rate may also affect the rate of interest your bank pays on the money in your savings account or term deposit. A high cash rate may mean you can grow your wealth more quickly from interest on your savings, while a low cash rate may mean less interest paid on your savings.

If the RBA raises the cash rate, your bank may pass on the change by raising the interest rate on your savings account. And if the cash rate is cut, the interest your bank pays on your savings may decline.  

Banks and other Authorised Deposit-taking Institutions (ADIs) may also adjust the interest paid on term deposits when the RBA changes the cash rate. However, if you already have a term deposit in place, you may have to wait until the end of the term when your deposit reaches maturity before you can choose to switch to a higher rate.

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