The Reserve Bank of Australia decides the cash rate. During the year, they meet a total of 11 times to determine the cash rate. What is the cash rate, and what does it affect?
What is the Cash Rate?
The cash rate is the official interest rate for Australia. This rate is the interest rate charged on loans between financial institutions. These funds are transferred overnight to help banks meet their daily cash needs. The cash rate affects the price of financial products for borrowers. Currently, the cash rate in Australia is .10%.
What Does the Cash Rate Affect?
Cash rates are the interest rates charged between financial institutions to fund loans for borrowers. Banks want to make a profit, so they will increase the interest rates for their customers. Low cash rates usually result in lower interest rates for borrowers on home loans, car loans, personal loans, and savings accounts.
How Does the RBA Determine the Cash Rate?
With the cash rate being so crucial for both banks and borrowers, the RBA must carefully decide the rate. It’s not a decision they make arbitrarily. They consider the following:
- Inflation: if inflation is too high and the costs of goods have increased too much, the RBA might raise the cash rate so Australians can keep their purchasing power.
- Employment: the number of people employed can indicate how well the Australian economy is doing. If unemployment is high, they may lower the cash rate to stimulate the economy and create new jobs.
- Economic growth: if economic growth is declining, they may lower the cash rate to incentivise people to spend and borrow
- Global economy: overseas economic growth can increase demand for products made in Australia, causing Australia’s economy to grow, allowing the RBA to raise the cash rate.
The cash rate is the most important factor in determining interest rates for your home loan. The brokers at Mortgage House can help you understand how the current cash rate affects your interest rates and your borrowing power.
