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What is the cash rate?
The official cash rate tends to influence financial products which could see you paying more, or less, on your loans. But what is it, why does it fluctuate and how could it affect you?
What is the cash rate in Australia?
The cash rate is the interest rate at which banks charge other banks to borrow unsecured overnight funds – which they do to manage their liquidity. It is set by Australia’s central bank, the Reserve Bank of Australia (RBA).
Why this matters for everyday Australians is that the cash rate is a type of benchmark rate that banks and lenders use for the interest rates of credit and saving products, such as home loans, savings accounts, and term deposits.
In an instance where the RBA announces a cash rate movement, banks and other lenders will then decide how they will respond to this, and whether they will pass it on to their customers either partially or in full.
When does the RBA meet to set the cash rate?
In 2023 the RBA will meet eleven times a year to determine whether to maintain the cash rate, hike it, or cut it, and to what extent. In 2023, this is the schedule of the monetary policy meeting of the RBA board:
- 7th February 2023
- 7th March 2023
- 4th April 2023
- 2nd May 2023
- 6th June 2023
- 4th July 2023
- 1st August 2023
- 5th September 2023
- 3rd October 2023
- 7th November 2023
- 5th December 2023
However, this schedule is set to change in 2024 following a Treasury review of the RBA earlier this year. The RBA Board will now meet only eight times a year moving forward. The new RBA Board meeting dates from 2024 onwards are as follows, with the cash rate announcement to occur on the second day (Tuesday):
- 5th–6th February 2024
- 18th–19th March 2024
- 6th–7th May 2024
- 17th–18th June 2024
- 5th–6th August 2024
- 23th–24th September 2024
- 4th–5th November 2024
- 9th–10th December 2024
What influences the cash rate?
The RBA Board will take a number of factors into consideration when determining whether to make changes to the cash rate, including:
Inflation
Inflation is the general increase in the price of goods and services in an economy. If inflation is getting too high, the RBA may decide to increase the cash rate to help Australians maintain their purchasing power.
Employment
Employment levels can play a big part in the RBA’s decision to change the cash rate. If unemployment levels are high, this may influence the RBA to consider lowering the cash rate in order to encourage company spending with the goal of creating more jobs.
Economic growth
The RBA may decide to lower the cash rate in response to slowing economic growth, as a way to stimulate spending in the economy.
How can the cash rate affect you?
While the official cash rate is the interest rate banks charge other banks to borrow money, it will typically influence how banks will set interest rates for their customers.
Here’s how cash rate changes could affect different types of banking customers:
Home loan borrowers | As a home loan is usually your largest household expense, variable rate mortgage holders may take the biggest hit in the case of a cash rate rise. Of course, this works both ways, so if your lender passes on a rate cut it could save you some money on interest charges and lower your repayments. |
Savers | Those with savings accounts could benefit from a rate rise, as their savings interest rate may increase and allow their nest egg to grow. Similarly, lenders may also decide to increase term deposit interest rates. However, if rates fall, your interest rate may fall too. |
Personal loan and car loan borrowers | If you have a car loan or personal loan on a variable interest rate, it’s possible that you may see your interest rate change in response to a cash rate movement. However, it may not be as immediate as changes made to other products. |
Credit card holders | Credit card interest rates don’t tend to fluctuate in response to cash rate changes. The average credit card purchase rate on the RateCity database has sat at around 16% for years. |
Typically, a lender or bank will change your interest rate in line with how the cash rate moves. For example, if the cash rate was increased by 0.50%, then your savings account interest rate may increase accordingly – and vice versa if it were decreased. This is why it is considered such an influential factor when it comes to your personal banking products.
However, lenders don’t always move interest rates in line with the RBA. In fact, following several cash rate hikes in 2022, there were many savings account providers that did not increase their customers’ savings rates.
This is why it literally pays to keep up with the cash rate movements, as avoiding it could see you staying with a provider that doesn’t pass on rate hikes to your savings products, or pass on rate cuts to your loan products.
Discover how high the big four banks think the cash rate will climb in 2023.
How often does the RBA cash rate change?
There is no hard and fast rule that determines exactly when the RBA will change the cash rate. In fact, the central bank previously left the cash rate on hold at 1.50% from September 2016 to May 2019.
However, if you want to determine how often, or how likely, it is that the RBA will change the cash rate, following the news on the the macroeconomic factors listed above may be helpful. The RBA carefully monitors these factors to determine if shifting the cash rate may be necessary to maintain healthy economic growth.
For example, in a period of swiftly rising inflation levels, the RBA may hike the cash rate to put downward pressure on consumer and business spending. If interest rates are higher, access to credit is more difficult, meaning Australians are less likely to spend and more likely to save, helping to slow down economic growth and inflation.
If you’re looking to forecast how the RBA may change the cash rate, it is worthwhile keeping up with the latest finance news, and monitoring these macroeconomic factors. It may be worth following economic experts on social media to stay up-to-date with the latest predictions and commentary.
Once the cash rate has changed, you do not want to be the last to know that your bank has (or has not) shifted rates. Regardless of the type of banking customer you are, it’s always worth comparing your financial product’s interest rate with that of others – particularly if there has been a recent rate change. Even marginal differences in interest rates can really add up over time, so it’s important to ensure yours remains competitive. Consider using RateCity's home loan comparison tables to get started.
Don’t sit around waiting for a letter from your lender, instead follow our RateCity Rate Tracker for live updates and alerts when your lender changes its rates.
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Product database updated 24 Nov, 2024
