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The RBA Cash Rate 101: Explaining the method behind the madness

With the RBA lifting interest rates consistently over the last few months, there has been much conversation about the how, the what and why of these decisions. Many mortgage holders have found the rises a hard pill to swallow as before this year it was well over a decade since rates moved upward. Australians have not flexed their “interest rate rise” muscle for quite some time and many have been feeling the pain as a result.

So, to break it all down, here is the RBA cash rate origin story and everything you need to know as you prepare for potential further increases.

What is the RBA Cash rate?

The cash rate reflects the “overnight” funds, which represents the funds lenders are willing to lend each other on an overnight basis to meet their daily cash needs. It also serves as a tool for steering the economy in a certain direction, being a driver of mortgage and savings interest rates along with the exchange rate.

What influences the RBA’s decision?


The rate of unemployment is a fair indicator of economic performance with high levels often triggering RBA drops to stimulate spending, investment, and job creation.


If inflation is above the RBA’s 2-3% medium-term growth metric, they may choose to act by raising rates to curb spending and drive prices down.

Economic Growth

Slowing economic growth may trigger a lowering of the cash rate to increase demand by incentivizing spending and borrowing.

International economics

Strong overseas growth may mean increased demand for Australian products, but if conditions are weak overseas or if there are tensions with trade partners, the RBA consider these factors in their deliberations.

How does the cash rate affect your home loan?

The cash rate is a major factor that banks consider when they set their variable rates with increases and decreases having a trickle-down effect on repayments. However, it is crucial to note that the cash rate is not the only factor that goes into the cost of funding. Banks also must factor in their operating costs such as branches, staff as well as interest paid out to customers among other things.

How does the RBA cash rate affect property prices?

Lower interest rates make taking out a mortgage more desirable which is why RBA rate cuts often spur interest in the property market. Competition can therefore lead to rising property prices. Higher interest rates have a reverse effect, with fewer people motivated to purchase a property and some being driven out of the market altogether through a decrease in their ability to service the debt.

There is much chatter about possible further rate rises, so the mortgage pain many are feeling may not be over. It is therefore crucial to review your current facilities and loan structures if you have not done so recently. Contact your Blackburne Mortgage broker for more information and to find out if there are avenues available to save on your home loan

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Paul Prindiville


0438 196 695