RBA Cash Rate

RBA stands for the Reserve Bank of Australia. It is Australia’s central bank, in charge of controlling the nation’s money supply (known as monetary policy) as a means of keeping Australia’s economy in check. It also helps regulate Australia’s financial system and its payments system policies.

The RBA is owned by the Commonwealth of Australia and provides banking services to the government as well as commercial and other clients. It was established by an Act of Parliament under the Reserve Bank Act 1959.

The RBA is made up of two different boards: the Reserve Bank Board which exercises monetary policy (the movement of the official cash rate), and the Payments System Board which regulates and controls Australia’s financial and payments systems.

The Reserve Bank Board gets a lot of attention from media, politicians, investors, and consumers over their cash rate decisions. The Board, made up of nine members, gets together on the first Tuesday of every month except January (11 times a year) to make a decision on whether to hold, raise or lower the official cash rate. The decision is always announced at 2:30pm AEST/AEDT.

Accompanying each cash rate announcement is the Board Governor’s statement on monetary policy which explains the reasoning behind the Board’s decision. Many people look to this statement for clues on what the RBA is going to do with the cash rate in the future.

The cash rate represents the target interest rate set by the RBA for overnight loans to commercial banks. Commercial banks borrow and lend to each other at this rate on an ‘overnight’ basis, meaning the borrowing bank repays the loan and interest at the start of the next business day.

The RBA’s Domestic Markets Department is responsible for overseeing money market operations on a daily basis to keep the cash rate as close as possible to the target rate set by the Reserve Bank Board. It does this by managing the supply of funds (known as exchange settlement funds) available to banks for overnight loans. The RBA supplies more of these funds when they want the cash rate to fall, but supplies less when they want the rate to rise.

Interest rates, particularly for home loans and savings accounts, generally closely follow movements in the cash rate. Banks do not have to pass on a cash rate change to their mortgages and savings accounts, but for financial and public image reasons, it is normally in their best interests to do so.

For example, when the RBA raises the cash rate, funding costs for the banks rise, so to counteract this, banks will pass on the rate hike to consumers via their interest rates for home loans, thus keeping bank profits intact.

But when the RBA cuts the cash rate, banks are also expected to lower the interest rates on their home loans. Otherwise the public might label them as ‘greedy’ for taking advantage of the lower funding costs to boost profits.

Compared to the impact of the cash rate on home loans, savings accounts and term deposits, the cash rate’s effect on credit card and personal loan interest rates is minor.

Since the cash rate strongly influences the interest rates charged by banks on products such as home loans and savings accounts, the cash rate has a significant effect on the finances of most Australians. How the cash rate affects you depends on what financial products you own, which has a lot do with what stage of life you’re in.

For instance, most retired Australians own a home outright, so they’re less concerned about rising home loan interest rates. But they are also more likely to have large retirement savings. Many retirees would appreciate a rise in the cash rate because it means they are likely to earn higher interest each month in their savings accounts.

Meanwhile, those with mortgages to pay off do not appreciate rises in the cash rate, because it generally means they will have to pay more to the bank each month in their home loan repayments.

The cash rate also has a broad effect on the Australian economy as a whole. A rate cut will help accelerate a slowing economy by encouraging more borrowing and spending, which in turn helps keep Australia’s unemployment rate down. But a rate hike can act as a brake on the economy, encouraging people to borrow less and save more.