RBA and interest rates, explained

Cash rates. Huh?

The cash rate is the rate banks pay to borrow overnight funds.

The RBA make the policy decisions about the cash rate, including what it is set at. And because the cash rate directly affects the banks’ pockets, it affects ours too.

Once a month, the RBA gang (AKA Board) get together to decide whether they’ll change the cash rate, or leave it as it is. When making that decision, they think about how the Aussie dollar is going, consumer confidence levels, the state of the housing market and Australia’s Gross Domestic Product (DGP).

For example, if the RBA wants to encourage Australians to spend more money and boost the economy, they will probably lower the cash rate. If they want to cool the market, they’ll increase rates so it’s more expensive to borrow money and people don’t spend as much. We’ve seen record lows in our cash rate recently, because the RBA has been trying to stimulate economic growth. Semi-unsuccessfully, but that’s another story.

If you really want to geek out on the RBA’s role and functions, go down the rabbit hole of monetary and banking policy, here.

Ok, so what about your home loan

Banks and lenders use the RBA’s cash rate as a benchmark for how they set their own rates on their home loans, and other financial products.

If the RBA increases the cash rate, it’s likely that the banks will increase the variable rate on their home loans too – because their costs have gone up, they’ll pass some of that cost on to you. But just because the RBA announces a cash rate change, it doesn’t mean your home loan rate will change by the same amount, too.

Banks and lenders can make their own decisions on what they do with their interest rates; which means they can choose to pass on all of the rate cut/increase, some of it, or none at all.

We just get to sit by the phone, waiting for our BFF to call and give us the news. Or in reality, read about the rate change in real time, online.

At least you now have some interesting banter to share with your BFF over your next smashed avo brunch date.

Want to take your interest rate banter to the next level? Read our article on how banks and lenders set their interest rates.