Written byThe cash rate is the interest rate the RBA targets for overnight loans between banks, the benchmark that anchors short-term funding costs and influences most Australian lending rates.
Also known as: official cash rate, cash rate target, RBA cash rate
Key points
- The Reserve Bank's Monetary Policy Board sets a target for the cash rate and uses market operations to hold the actual rate there.
- It is the main lever of monetary policy: raising it slows borrowing and spending, lowering it does the opposite.
- A move in the cash rate flows through to variable rate loans, though each lender decides how much of it to pass on.
- Changes are announced in basis points, so a quarter of a percentage point move is described as twenty five basis points.
How the cash rate works
Banks hold accounts with the Reserve Bank and lend to each other overnight to square up their balances at the end of the day. The cash rate is the interest rate on that overnight lending. The Reserve Bank's Monetary Policy Board sets a target for it, then operates in the money market so the actual rate stays close to the target.
That one number matters because it prices the shortest, safest money in the system. Term deposits, overdrafts, home loans and equipment finance are all built on top of it. When the target moves, the whole structure of rates tends to shift, even if not by the same amount.
How the cash rate reaches your loan
A cash rate change does not automatically change what you pay. Lenders fund themselves from deposits and wholesale markets as well as from overnight cash, so their own costs only partly follow the target. Each lender decides whether to pass a move on in full, in part or not at all, and when it takes effect.
If your loan is regulated consumer credit, the lender must notify you no later than the day the change takes effect, and a rate rise can be notified by public advertisement rather than a letter to you. Business contracts set their own notice terms, so check the rate clause. If it is a fixed rate loan, or a fixed car loan or equipment contract, nothing changes during the fixed period, because the rate was locked when the contract was written.
What the cash rate means for borrowers
For households, cash rate moves turn up in mortgage repayments and in what savings accounts pay. For businesses, they turn up in overdrafts, working capital lines and the pricing of new asset finance. Contracts already fixed are insulated until they roll off.
Watching the cash rate is less useful than watching what your own lender does with it. If your rate has drifted away from what is available elsewhere, refinancing or asking your lender for a review usually does more than waiting for the next board meeting.
Example
The Reserve Bank's Monetary Policy Board lowers its cash rate target. A plumber with a variable loan on a $65,000 ute hears about it on the radio and expects the repayment to drop straight away. The lender takes a few weeks to decide, passes on part of the move, and writes to say the new repayment starts from the following month. A second ute, financed on a fixed contract two years ago, is unaffected until that contract ends.
Not to be confused with
- RBA
- the RBA is the institution; the cash rate is the target that its board sets
- Comparison rate
- a comparison rate tells you what one loan costs you, not what the benchmark behind it is doing
Frequently asked questions
What does the cash rate mean for me?
If you have a variable loan, it shapes what you pay: when the target rises, most lenders lift rates, and when it falls, many cut them. If you have savings, it shapes what you earn. On a fixed contract it makes no difference until the fixed period ends.
Who sets the cash rate in Australia?
The Reserve Bank of Australia. Its monetary policy board sets a target for the cash rate to meet its inflation and employment objectives, and the bank then operates in the money market so the actual overnight rate tracks that target closely.
How often does the cash rate change?
The board meets on a published schedule through the year and can change the target at any of those meetings, or between them if conditions demand it. In practice the rate often sits still for long stretches and then moves in a run of steps.
Do lenders always pass on a cash rate cut?
No. Lenders are not required to move their rates when the target moves. They weigh their own funding costs, competition and margins, so a cut may be passed on in full, partly, or not at all. It is worth asking your lender directly what they are doing.
Does the cash rate affect fixed rate loans?
Not during the fixed period. Your rate was set when the contract was written, so movements after that do not change your repayments. The cash rate does affect the rate you are offered when you fix, and the rate you revert to when the fixed period ends.
Related terms
RBA
The RBA (Reserve Bank of Australia) is Australia's central bank: it sets the cash rate that flows through to loan and savings rates, and operates key payment settlement systems.
Read definitionVariable rate
A variable rate is an interest rate that can move up or down over the life of a loan, following the lender's benchmark and its margin.
Read definitionFixed rate
A fixed rate is an interest rate locked in for a set term, so the rate and usually the repayments do not change until that term ends.
Read definitionInterest
Interest is the price of using money: what a borrower pays on a loan, or a saver earns on a deposit, expressed as a percentage rate on the principal.
Read definitionComparison rate
A comparison rate is a single annual percentage that combines a loan's interest rate with most upfront and ongoing fees to show its ongoing cost more clearly.
Read definitionBasis point
A basis point (bps) is a unit equal to one hundredth of a percentage point, used to express small changes in interest rates, yields, fees and spreads.
Read definitionGo deeper
Sources
This article is general information only and is not financial advice.