We explain how the monthly change in the cash rate impacts your money.
Welcome to interest rates 101, Flux Fam. We’re about to give you the 411 on the official cash rate.
If the three words ‘official cash rate’ mean nothing to you, then you’re definitely not alone. But the official cash rate is actually a big part of your finances.
It determines the interest you could make on your savings accounts, and can impact the cost of your home loan repayments.
Let’s break it down.
The official definition of the official cash rate is the interest rate on unsecured overnight loans between banks.
If this is you RN...Don’t stress.
Essentially, banks are just like us. They borrow money from depositors (like you and me with our savings account) as well as other banks and investors.
And just like us, they need to pay interest on the money that’s been loaned to them.
When they borrow money from banks (like the Reserve Bank of Australia), they pay an interest rate (aka cash rate).
The Reserve Bank of Australia - aka Australia’s central bank - is responsible for setting Australia’s monetary policy and issuing our currency. Oh, and it’s also like the Government’s own personal bank.
All of this means it has the power to determine our official cash rate, which it does on the first Tuesday of every month (except January - we rest easy then).
So far, the cash rate is at 1.85%. It has jumped 4 months in a row - but it came off a record-low cash rate of 0.1%.
Have you been earning bugger-all from your savings accounts? We thought so. You can thank the official cash rate for that. While banks and lenders don’t have to change their interest rates to stay in line with the RBA’s official cash rate, it does serve as a benchmark for banks to follow.
So, if the RBA increased the official cash rate by 25 basis points, or 0.25%, then banks could potentially increase their savings or home loan rates by the same amount.
On the other hand, if the RBA decreased the official cash rate by 25 basis points, or 0.25%, then they could do the opposite.
You’ll tend to find banks are quick to cut savings rates, but don’t always pass on the same benefits to home loan rates. That’s why savings rates are sitting at around 0.15%, and home loan rates are still around the 2-to-3% mark.
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