The Reserve Bank of Australia's (RBA) cash rate target is arguably the most important base interest rate in the nation, and in-part determines the interest rate on products such as home loans, savings, accounts, term deposits, and more. A high RBA cash rate is usually not as good news for those borrowing money as it is for those saving money, and vice versa.
As of December 2023 the cash rate target has been held at 4.35%.
Every month, excluding January, RBA Board members determine the cash rate in a meeting. This usually comes with a statement by the Reserve Bank Governor justifying the Board's reason for altering or leaving the cash rate on-hold.
From 2024 the RBA will meet eight times per year, instead of 11. Meetings will be held over two days instead of one, similar to the United States' Federal Reserve Open Market Committee (FOMC). This is to give board members additional time to discuss and consider economic indicators and the impact of the cash rate.
The current RBA Governor is Michele Bullock, with her term starting on 18 September 2023. The term is due to expire 17 September 2030.
Interest Rate Movements History
|Date*||Owner Occupier Standard Variable Rate||RBA Cash Rate|
Updated: 7 November 2023
What does the RBA cash rate actually do?
The RBA's cash rate target is Australia's base interest rate, and is the basis for which financial institutions such as banks charge on loans to other institutions. Usually there are other factors at play, but it all tends to fall back on the central bank's cash rate target.
1. Determines interest rates on financial products
As the cash rate target is a base interest rate, this determines the interest rate charged on financial products such as home loans, car loans, savings accounts, term deposits, and more. A high or increasing cash rate usually results in a higher variable home loan rate, as seen in the table above. On the flipside, a higher cash rate also tends to boost the interest rate on savings accounts and new term deposits. The opposite is true for a low or decreasing cash rate.
RBA acts as bank for the banks
The RBA acts as a bank for retail banks we're familiar with such as CommBank, ANZ, NAB and Westpac. Retail banks can park cash in what's called the Exchange Settlement Balance. This is where the banks can also transact with one another, and earn interest from the RBA, called the near-risk free rate. This is usually a reflection of the cash rate target, or the overnight rate when quantitative easing is taken into account (more on that later). A low cash rate essentially signifies to the retail banks they need to dish out money to earn interest from elsewhere, such as financial lending products, and other wholesale markets. This keeps the wheels turning in times of financial crises.
2. Controls inflation
The RBA's remit is to promote the financial stability of Australian households, and also to keep a lid on inflation. In simple terms, high inflation is simply too much money chasing too few goods. This then drives prices up. The RBA likes underlying inflation (headline inflation minus seasonal or short-term spikes) to be in the 2-3% annual band.
A major way the RBA can control inflation is to alter the cash rate. By putting it up, this takes demand out of the markets as borrowing money is now more expensive. In times of slow economic growth, the RBA can cut the cash rate to make money cheaper and hence stimulate the economy.
Post-Covid, inflation in Australia has been at levels not seen in more than 30 years. This is because of supply chain issues, the war in Ukraine, and adverse weather events - and an incredibly low cash rate unchanged for nearly 18 months at 0.10%.
On the other side is that many households have had lots of cash squirrelled away after the best part of two years locked down. This is reflected in the Australian Bureau of Statistics' household savings ratio, which hit near-50 year highs during Covid and came down sharply post-pandemic and as interest rate rises hit household budgets.
Why is the RBA cash rate a 'target'?
The RBA's cash rate is not set in stone - instead the central bank opts for a 'target'. This is slightly different to other central banks, such as New Zealand's, which opt for an official cash rate or OCR. This is because other RBA operations can influence the overnight rate, or what banks actually pay to each other to borrow money.
One of the largest recent operations altering the cash rate was the RBA's quantitative easing program starting in March 2020. This was the first time the RBA enacted quantitative easing, or QE. QE is the process of a central bank intervening in the secondary Australian Government Bond market. Usually institutional investors such as super funds, banks and other companies purchase government bonds, which the Federal Government issues to fund its own operations and spending goals when taxation revenue is not enough.
As the RBA essentially has a monopoly in this market, the sheer quantity of bonds purchased, eases the interest the government has to pay on its debts. This gives more money for the government to play with; at one stage the RBA was purchasing $4-5 billion per week in government bonds, and from March 2020 to February 2022 it's thought the central bank bought around $300 billion worth. The sheer amount of money flowing in the market means that the overnight rate reached close to 0%.
This in part led to gross Australian government debt of nearly a trillion dollars. This has real-world consequences. Currently the average full time Australian worker with a tax bill of $20,000 pays more than $650 of that towards repaying interest on government debt. This is expected to go higher now as interest rates push higher.
RBA cash rate recent history - a brief overview
The Reserve Bank of Australia was established in 1959. Before that, the government-owned Commonwealth Bank of Australia acted as central bank. Until 1994 interest rate decisions weren't publicly announced.
Now, the RBA gives arguably better access to its inner-workings than ever before, regularly publishing statements, media releases, commentary and other news. Recently there has been a push to publicly disclose Board members' dissenting views on interest rate decisions like the Bank of England and other central banks.
Over the past 30 years or so, the cash rate has been on a downward trend, save for a few short periods of interest rate hikes - most notably in the mid to late 2000s in the run-up to the Global Financial Crisis. This reflects a wider global trend of interest rate declines. This is in part due to persistently low inflation relative to what was experienced prior to 1990.
A large part of this is due to much lower technology prices, and globalisation playing its hand in lowering manufacturing and tradeable goods' prices. For example, why would a company choose to make a shirt in Australia for $20 when a relatively free trade agreement with China could see that shirt made for $1?
This culminated in early 2020 at the onset of the Covid pandemic, when the RBA made an unprecedented two rate cuts in March down to 0.50% and then later in the month 0.25%.
In November 2020 the RBA made a 'Melbourne Cup Cut' and lowered the cash rate to an all time low of 0.10%. There it stayed until May 2022.
Now in the Covid aftermath inflation has started taking off. Supply chain disruptions because of the virus, microprocessor and silicone shortages, the war in Ukraine, and some countries opting to move goods and services back on-shore has pushed up inflation.
Many economists at the major banks in Australia say that a cash rate in the 4% realm will be the peak, from mid-to-late 2023, before a series of cuts sees it trend lower from 2024.
However Viktor Shvets, Macquarie Bank's head of global strategy, said central banks over the next period will yo-yo with cash rates as they toy with inflation and deflation.
"Unlike the previous 20 years, where outcomes were relatively modest … they’ll just go up and down quite rapidly and [will get] incredibly high and incredibly low, and that’s what I call the inflation-disinflation pendulum," Mr Shvets said.
Time will tell.
Image of Michele Bullock, RBA Governor, generated by MidJourney AI.