Each month, the Reserve Bank of Australia (RBA) declares whether the established cash rate should remain constant or be changed. This announcement has considerable consequences for banks, stakeholders, and Australians in general. If you want to know what all this cash rate increases and decreases talk really means, we’ve got you covered.
What is the Cash Rate?
The cash rate is the interest rate that the RBA sets for providing money to financial institutions within Australia. It is also referred to as a target rate and is used for setting borrowing costs for businesses, households, and other lenders. It is also known as the “overnight money market interest rate”. This is because the banks often provide one another with funds on an overnight basis, and the cash rate is the cost of borrowing for such transactions. This rate is set by the Reserve Bank of Australia, determining the interest that banks are required to pay when borrowing money.
What is the RBA and what do they do?
The Reserve Bank of Australia is the central bank of the nation, tasked with helping maintain a stable currency, full employment, and economic prosperity. To do this, its board of directors meets regularly to make transactions and monetary policies – most notably, they set the official cash rate. On almost every first Tuesday of each month (except January), the board gathers to decide whether or not it should adjust the cash rate. It has three choices; lower it in order to invigorate borrowing and spending, raise it to safeguard against inflation, or keep it static. The Reserve Bank of Australia considers many variables when deliberating the alteration of the cash rate. In general, changes can be prompted by economic growth, job availability, and inflation.
Will the cash rate affect the banks’ interest rates?
In accordance with the RBA, while their cash rate statements carry weight, they do not exclusively determine how financial institutions set their interest rates. Three integral elements are taken into consideration by banks and lenders when determining whether to increase or decrease their rates:
- Funding costs – Banks acquire funds from other banks and depositors at a cost, otherwise known as funding costs. If these costs rise, banks may up the rates they levy on their borrowers to continue earning profits. But if financing rates increase, people may be more reserved in borrowing money.
- Competition from other banks – To compete with other lenders and banks in Australia This competition interest rates may change to draw in new borrowers and refinancers.
- Risk of default – Banks and loan providers are always mindful of risk. When assessing a potential borrower, they’ll be sure to gauge the degree of risk that ensues from giving out a loan. If they think lending money to an investor who carries more risks, the interest rates for that lending may be higher.
How does cash rate affect deposits?
The cash rate is the reference for interest rates on savings accounts and term deposits. An increase in the cash rate could lead to higher interest on deposits, incentivising individuals’ money. Yet if the cash rate is low, banks may reduce the interest they offer, making it less attractive for people to place their funds in such accounts.
By understanding the implications of the RBA’s decisions, you can make more informed decisions and take advantage of potential opportunities, like refinancing or consolidating debts. If you think the cash rate changes will affect your pre-existing loans, the team at ezpz Finance is here to help find flexible solutions to your personal finances that leave you feeling safe and secure.
At ezpz Finance, we make finance ez. If you would like to discuss taking out a personal loan or consolidating an existing loan follow the link provided: https://ezpzfinance.com.au/finance/personal-loans/
