It has been well reported the cash rate has been going up, and with it interest rates for home loans. But what is the connection between the two? And what exactly is the cash rate? We break down how it could actually impact you.
What is a cash rate?
The cash rate is an interest rate set by the RBA that determines what banks and lenders pay to borrow money overnight. This then gets passed down to the consumer through the bank or lender’s own interest rates, both for loans and deposits such as savings accounts.
What is the RBA and why does it set the cash rate?
The RBA is Australia’s central bank, made up of a board of members appointed by the Treasurer. It drives monetary policy for the nation with the aim to encourage economic stability, employment and prosperity for Australians. It aims to meet its inflation target and maintain a strong financial system, as well as issuing the country’s banknotes.
The board meets eight times a year to discuss policy and potentially change the cash rate. Why would they change it? There are a number of factors. For example, if inflation is above target, increasing the cash rate could help cool down spending by households, which could help bring inflation back down. If unemployment is too high, decreasing the cash rate could encourage more investment and spending to create more jobs.
How does the cash rate impact me?
The cash rate is one of the main factors influencing the interest rates the banks charge on home loans and place on savings. If the cash rate goes up, variable rates on loans usually also go up, meaning if you have a variable-rate home loan, your repayments would increase. Usually savings interest rates also increase, meaning money you have in a savings account could accrue more interest (depending on the bank).
However, it is important to note the cash rate is not the only determining factor of interest rates. Other factors include funding costs (the cost for the lender to borrow money – where the cash rate plays a role), competition from other banks and risk of default (if a loan is considered riskier, it is likely it will attract a higher interest rate).
