How the RBA cash rate reaches your money
One number, set eight times a year in Sydney, flows through to your mortgage, your savings and the price of your shares. Here is how.
What the cash rate is
The cash rate is the interest rate banks charge each other to borrow overnight. Banks lend to one another every day to settle the payments their customers make, and the cash rate is the price of that money.
The Reserve Bank of Australia does not set the rate by decree. It announces a target, then keeps the actual overnight rate at that target by managing how much cash is in the banking system. FinVolio charts the target itself, from the Reserve Bank’s daily statistics.
How it is set
The Reserve Bank’s Monetary Policy Board meets eight times a year and announces its decision at 2:30pm Sydney time. Its job, set out in its agreement with the Treasurer, is to keep inflation between 2 and 3 per cent, aiming for the middle, while supporting full employment.
When inflation runs above that band, the board raises the rate to cool spending. When the economy weakens and inflation is under control, it cuts.
How a change reaches you
Mortgages. Most Australian home loans are variable, so banks usually pass on a change within weeks. This is why rate decisions matter more here than in countries where 30-year fixed mortgages are common.
Savings. Deposit and term deposit rates follow the cash rate, though banks tend to move them less, and later.
Shares. Higher rates make a safe deposit more attractive compared with shares, and raise the rate investors use to value a company’s future profits. Companies whose profits are expected far in the future, such as technology firms, tend to be hit hardest. Banks can benefit, because they often earn a wider margin when rates rise.
The Australian dollar. Higher rates here than overseas attract foreign money, which tends to support the dollar. What matters is the gap with other countries, especially the United States.
What markets watch
Markets rarely wait for the decision. Bond yields and the dollar move on what investors expect the Reserve Bank to do, so a decision that matches expectations can pass with little reaction. The surprises are what move prices.
The figures that shift expectations most are the monthly consumer price index from the Australian Bureau of Statistics (especially the trimmed mean, the Reserve Bank’s preferred underlying measure), the monthly unemployment rate, wage growth, and what the Reserve Bank itself says in its statements and its quarterly Statement on Monetary Policy.
General information only, not financial advice.