Cash rate vs interest rate: how are they different?
Australia’s official cash rate and the interest rates on loans and bank accounts are two different things. But the cash rate can have a strong influence over the interest rates applied to these products by banks and other lenders. Here’s how the two differ.
Australia’s official cash rate and the interest rates on loans and bank accounts are two different things. But the cash rate can have a strong influence over the interest rates applied to these products by banks and other lenders. Here’s how the two differ.
What is the cash rate?
The cash rate is a rate set by the Reserve Bank of Australia (RBA) representing the interest that banks and lenders have to pay on the money that they borrow. Over the course of doing business, banks transfer money back and forth between each other, and the cash rate is the interest paid on this money.
The cash rate is sometimes referred to as the “overnight money market interest rate”, because transfers between banks are typically processed overnight, and the cash rate determines how much interest must be paid on transferring this money.
Currently, the cash rate sits at 4.35%.
What is the RBA and how does it control the cash rate?
The RBA is Australia’s central bank. Per the bank’s charter, which is displayed on its website and on the walls of the RBA building in Sydney, it has a duty to guide monetary and economic policy in in the way it thinks will best contribute towards:
- the stability of the currency of Australia;
- the maintenance of full employment in Australia; and
- the economic prosperity and welfare of the people of Australia.
The RBA board formerly met on the first Tuesday of each month, excluding January – as of 2024, the board meets eight times per year, for two days, announcing its decision on a Tuesday. The board sets the cash rate as a means of regulating the economy, and at each meeting, they can choose to move the cash rate up or down, or hold it steady.
In November of 2020, the board set the cash rate at a record low level of 0.10%, to combat the ongoing economic effects of the COVID-19 pandemic.
Chairman at the time, Philip Lowe, said that the cash rate likely would not rise again until 2024, however, high inflation led the central bank to act sooner, raising it in May of 2022, and continuing to raise it almost every month since.
At its board meeting in November 2023, under new Chairman Michele Bullock, the RBA chose to raise the cash rate to 4.35%, a level that analysts at Australia’s big four banks have predicted may be the peak. The RBA has held the cash rate here since then, and the next decision is due to be announced on Tuesday May 7.
2024 Reserve Bank of Australia (RBA) board meetings
- 5–6 February
- 18–19 March
- 6–7 May
- 17–18 June
- 5–6 August
- 23–24 September
- 4–5 November
- 9–10 December
The RBA will announce its next cash rate decision on Tuesday May 7, with economists predicting that the cash rate will likely stay stable at its current level for several months, before possible cuts.
Bear in mind that the RBA’s monetary policy decisions, including setting the cash rate, are only one half of the economic policy picture in Australia. The federal government accounts for the other half, setting the nation’s fiscal policy through the Budget and other laws.
Nonetheless, the cash rate plays a key role in determining how much money banks have to pay to borrow money from each other, which in turn can influence how much interest they decide to charge customers on loans, and how much to offer them on products like savings accounts and term deposits.
How does the cash rate affect interest rates?
Banks and other lenders set their own interest rates for the loans and deposit products they offer – generally speaking, you will pay interest on money that you borrow, and earn it on savings that you deposit. While the cash rate does not determine interest rates directly, banks and lenders will pay close attention to it when setting them, and will often respond to moves that the RBA makes.
If the RBA raises the cash rate, then it will cost more for banks to transfer money between themselves. Banks and lenders will typically pass these costs on to consumers in the form of rate rises, meaning anyone who has borrowed money from that institution will be charged more interest.
An example of this was seen in May 2022 when the RBA raised the cash rate by 25 basis points (interest rate changes are often expressed as ‘basis points’, and you can read more about what this means here).
In the days that followed, all of Australia’s big four banks and a number of other lenders raised interest rates on their variable home loans by the same amount, or announced they would do so in the near future.
When the RBA raises the cash rate, some banks may also choose to raise interest rates on savings accounts and term deposits. This means that customers may be able to earn more interest on the money they deposit with these institutions. Following the RBA’s May 2022 announcement, all of the big four banks also announced increases to savings account or term deposit rates.
If the RBA lowers the cash rate, banks and lenders may well respond by lowering the interest rates on their home loans, but may also lower the interest rates on savings accounts and term deposits.
What factors can affect the cash rate?
When the RBA sets the cash rate, it takes into account three main things: the inflation level, the employment level and the rate of growth in the economy. The levels of these three things can dictate whether the RBA chooses to move the cash rate up or down.
When would the RBA move the cash rate up?
The RBA might move the cash rate up if it feels that inflation is getting too high. Inflation refers to the increase in the price of goods and services across the economy. If it gets too high, the RBA might raise the cash rate to assist Australians in maintaining their purchasing power.
When would the RBA move the cash rate down?
If the RBA board is concerned that the unemployment rate in Australia is too high, it might move the cash rate down in order to stimulate investment and spending in the economy by making it cheaper for businesses to borrow money, potentially creating jobs as a byproduct.
If the RBA board perceives economic growth to be slowing, then it might choose to lower the cash rate for similar reasons. This was the case in November 2020, when the board dropped the cash rate to the record-low level of 0.10% to encourage economic growth and activity.
When would the RBA maintain the cash rate?
If the RBA board feels that employment, inflation and economic growth are at a balanced level, it might choose to hold the cash rate at its current level. Despite rising inflation and house prices throughout the period, the RBA board chose to hold the cash rate from December 2020 until May 2022, in an attempt to help the Australian economy recover from COVID-19.
Compare Home Loans (Refinance with variable rate only) with Canstar
If you’re currently considering a home loan, the comparison table below displays some of the variable rate home loans on our database with links to lenders’ websites that are available for homeowners looking to refinance. This table is sorted by Star Rating (highest to lowest), followed by comparison rate (lowest to highest). Products shown are principal and interest home loans available for a loan amount of $500,000 in NSW with an LVR of 80% of the property value. Consider the Target Market Determination (TMD) before making a purchase decision. Contact the product issuer directly for a copy of the TMD. Use Canstar’s home loans comparison selector to view a wider range of home loan products. Canstar may earn a fee for referrals.
Canstar is an information provider and in giving you product information Canstar is not making any suggestion or recommendation about a particular product. If you decide to apply for a home loan, you will deal directly with a financial institution, not with Canstar. Rates and product information should be confirmed with the relevant financial institution. Home Loans in the table include only products that are available for somebody borrowing 80% of the total loan amount. For product information, read our detailed disclosure, important notes and additional information. *Read the comparison rate warning. The results do not include all providers and may not compare all the features available to you.
Home Loan products displayed above that are not “Sponsored or Promoted” are sorted as referenced in the introductory text followed by Star Rating, then lowest Comparison Rate, then alphabetically by company. Canstar may receive a fee for referral of leads from these products.
When you click on the button marked “Enquire” (or similar) Canstar will direct your enquiry to a third party mortgage broker. If you decide to find out more or apply for a home loan, you can provide your details to the broker. You will liaise directly with the broker and not with Canstar. When you click on a button marked “More details” (or similar), Canstar will direct your enquiry to the product provider. Canstar may earn a fee for referral of leads from the comparison table above. See How We Get Paid for further information.
Cover image source: WAYHOME Studio/Shutterstock.com
Thanks for visiting Canstar, Australia’s biggest financial comparison site*
This article was reviewed by our Senior Finance Journalist Michael Lund before it was updated, as part of our fact-checking process.
Alasdair Duncan is a Senior Finance Journalist at Canstar, specialising in home loans, property and lifestyle topics. He has written more than 200 articles for Canstar and his work is widely referenced by other publishers and media outlets, including Yahoo Finance, The New Daily, The Motley Fool and Sky News. He has featured as a guest author for property website homely.com.au.
In his more than 15 years working in the media, Alasdair has written for a broad range of publications. Before joining Canstar, he was a News Editor at Pedestrian.TV, part of Australia’s leading youth media group. His work has also appeared on ABC News, Junkee, Rolling Stone, Kotaku, the Sydney Star Observer and The Brag. He has a Bachelor of Laws (Honours) and a Bachelor of Arts with a major in Journalism from the University of Queensland.
When he is not writing about finance for Canstar, Alasdair can probably be found at the beach with his two dogs or listening to podcasts about pop music. You can follow Alasdair on LinkedIn and Twitter.
Low fees
Flexible options
Try our Home Loans comparison tool to instantly compare Canstar expert rated options.