When you hear news of changing interest rates around Australia, you’ll also hear mention of the Reserve Bank of Australia (RBA). But how exactly do they influence interest rates and what’s the difference between the cash rate and interest rates?
The Reserve Bank of Australia (RBA)
The RBA is Australia’s central bank which oversees Australia’s monetary policy and issues our currency. The bank performs roles and functions which can affect the interest rate on your home loan. Owned entirely by the Australian government, the RBA manages the stability of the Australian dollar by setting the interest rate in overnight money markets. They also maintain and promote employment in Australia and economic growth by keeping the interest rate low, without making it so low that it sparks inflation. This interest rate filters through to banks which affects the rates at which they lend money to businesses and consumers
The RBA and the cash rate
The RBA is responsible for setting Australia’s official cash rate. The cash rate is the interest rate on overnight loans in the money market. Every month (except January), the RBA board reviews the current cash rate, assesses the state of the economy, and decides if it will hold, increase or decrease the cash rate. This cash rate isn’t the interest rate you pay on your home loan, but when the cash rate increases or decreases, banks and lenders can decide to pass on this change in interest rate to your home loan.
How does the cash rate affect the interest rate?
When a lender or bank sets their interest rates for home loans, they consider Australia’s cash rate. The cash rate helps them decide whether they increase or reduce the interest rate for borrowers. If the cash rate is increased, it is likely your lender will increase the interest rates on their home loans. If you have a fixed rate home loan, these changes won’t affect you. However, if you have a variable home loan, any changes your lender makes to the interest rate will affect you. Your lender can also make changes to interest rates when the RBA doesn’t.
While the RBA sets the cash rate for Australia, it’s ultimately up to the bank or lender to decide what interest rates will be charged on a home loan. Make sure you do your research and shop around for the best interest rates for your particular situation.