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Who is the RBA and what is the ‘cash rate’

On the first Tuesday of every month, the Reserve Bank of Australia (RBA) announces what it plans to do with interest rate. Whilst it very rarely exceeds a ¼% increase or decrease, it often gets a mention on the evening news.

It’s a fundamental influence on our national economy and can very much impact our personal finances and decisions.

Who Is the RBA?

The RBA is Australia’s central bank. Unlike commercial banks, they don’t provide bank accounts and loans to the general public, their customers are the commercial banks.

What Do They Do?

The RBA sets the official interest rate for Australia, known as the ‘cash rate’, which is the rate they and commercial banks lend to one another. This influences, but is not wholly indicative of, the interest rates on savings accounts and loans issued by financial institutions.

Why Do They Do It?

The goal of the RBA is to manage inflation, employment and general financial wellbeing in Australia by implementing their monetary policy. Broadly speaking, when the economy is strong and booming, the RBA may raise interest rates in order to manage growth.

Conversely, at times when the economy is taking a hit, such as the impact Australia felt from Covid-19, they may lower the cash rate to stimulate demand and household spend.

What Are the Impacts on Us?

The impact of interest rate can have a knock on effect in many areas, however, most visible to us with our financial products.

For those with money in savings accounts, the variations may be reflected in the interest rate a bank pays us on our balance. This may only be negligible each time your rate is adjust, but may add up over time.

On the flip side, those who are the borrowers with a home loan on a variable interest rate may see an adjustment to their repayments to their lender. It may not happen each time the cash rate is adjusted as there are many other factors, however, in Australia the cash rate is at record lows which has offered borrowers substantial opportunities.

Cash rate changes may also impact the exchange rate globally, so when interest rates are higher you may find the Aussie dollar buying more in overseas currency.

 

Disclaimer: The ideas, discussions, options and details expressed in SCCU Blogs are for general informational purposes only and are not intended to provide specific personal advice or recommendations for any individual or on any specific security or investment product. We intended only to provide education about the financial and banking industry to make the complex simple, and help everyday customers realise their dreams.

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