Cash rate On hold in April. What does this mean for me?
After it's April board meeting, the Reserve Bank of Australia (RBA) decided to hold the cash rate for the first time since May 2022. The cash rate remains at 3.6%. This could provide some reprieve to households that have experienced regular hikes to the interest rates over the last 12 months. It's been well reported the cash rate has been going up and, with it, interest rates for home loans. But what's the connection between the two? And what exactly is the cash rate? Let’s breakdown 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 lenders own interest rates, both loans and deposits such a 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 on the first Tuesday of every month (except January) 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, a decrease in 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 placed on savings. If the cash rate goes up, variable rates on home loans usually also go up, meaning if you have a variable-rate home loan, your repayments would increase. Usually savings interest rates also increase comma meeting money you have in savings accounts could accrue more interest (depending on a bank).
However, it's important to know 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's likely it will tracked a higher interest rate).
Andrew Thompson | National Director, Loan Market Group
The information provided in this article is on the understanding that it is for illustrative and discussion purposes only. Whilst all care and attention is taken in its preparation any party seeking to rely on its content or otherwise should make their own enquiries and research to ensure it's relevance to your specific personal and business requirements and circumstances. Terms, conditions, fees and charges may apply. Normal lending criteria apply. Rates subject to change. Approved applicants only.
