The RBA Cash Rate vs Bank Interest Rates: What It Means for You

Understanding the link between the RBA cash rate and bank interest rates gives you a clearer picture of why your mortgage repayment changes or why your savings account earns more or less.

When you hear that the Reserve Bank of Australia (RBA) has changed “the cash rate,” it often makes headlines. Soon after, banks announce adjustments to their home loan rates, deposit rates, and credit card charges. But what exactly is the cash rate? How does it differ from the interest rates banks set? And why does the RBA make these changes in the first place?

This explainer breaks down the connection between the RBA’s cash rate and the interest rates you pay or earn, and explores the bigger picture of why rate changes matter for the economy.

What is the RBA Cash Rate?

The cash rate is the overnight interest rate that banks charge each other for unsecured loans.

Banks lend to one another all the time to manage their daily cash needs. Some days a bank may have extra funds (from deposits or other inflows), while another may be short. The RBA facilitates this system, ensuring liquidity flows smoothly. The rate at which these very short-term loans are exchanged is the cash rate.

Think of it as the base price of money in Australia’s financial system.

The RBA doesn’t directly set every interest rate in the economy, but it targets the cash rate and uses its policy tools to keep actual overnight rates very close to this target.

What are Bank Interest Rates?

Bank interest rates are the rates that banks offer or charge to customers—on home loans, savings accounts, business loans, credit cards, and more.

• Borrowers care about loan rates (e.g., a mortgage at 5.5% per annum).

• Savers care about deposit rates (e.g., a term deposit paying 4% per annum).

These rates are not identical to the RBA’s cash rate, but they are heavily influenced by it. Banks set their rates based on a combination of:

1. The RBA cash rate target – the starting point for the cost of funds.

2. Funding costs – what banks pay to access money in wholesale markets, deposits, and overseas borrowing.

3. Operational costs and risk margins – covering potential defaults, regulatory requirements, and profit margins.

   
   

So while the cash rate is like the wholesale cost of money, bank rates are the retail prices you and I deal with.

The Relationship Between the Cash Rate and Bank Rates

When the RBA changes the cash rate, it sets off a chain reaction through the financial system.

1. Cash Rate Target Moves – The RBA announces a change, for example lowering the cash rate from 4.35% to 4.10%.

2. Wholesale Funding Costs Adjust – The cost of short-term borrowing for banks falls (or rises).

3. Banks Reprice Loans and Deposits – To reflect their changed cost base, banks usually adjust home loan, credit card, personal loan, and savings deposit rates.

4. Customer Impact – Borrowers’ repayments rise or fall, and savers see changes to the returns on deposits.

5. Economic Impact – Household spending, business investment, and overall demand in the economy shift, influencing growth and inflation.

   
   

Importantly, banks don’t always pass on cash rate changes in full. A 0.25% RBA cut may result in only a 0.15% cut to mortgage rates, depending on funding costs and competitive pressures.

Why Does the RBA Change the Cash Rate?

The RBA uses the cash rate as its main tool to influence the economy. Its goal is to support sustainable growth, low unemployment, and inflation that averages 2–3% over the medium term.

Here’s why the RBA might move the rate:

1. To Control Inflation

• Rising inflation (prices increasing too quickly) → RBA raises the cash rate.Higher borrowing costs slow spending and borrowing, cooling demand and price growth.

• Low inflation or deflation (prices stagnant or falling) → RBA lowers the cash rate.Cheaper borrowing stimulates spending, supporting economic activity and preventing stagnation.

2. To Support Employment

The RBA also aims for “full employment.” Lower rates encourage businesses to invest and hire; higher rates may slow hiring but prevent the economy from overheating.

3. To Stabilise the Economy

Global shocks, financial instability, or a housing bubble can all influence RBA decisions. For example:

• During the COVID-19 pandemic, the RBA slashed rates to record lows (0.10%) to keep credit cheap and support households and businesses.

• In 2022–23, with inflation spiking above 7%, the RBA lifted rates aggressively to bring price growth back under control.

  
  

A Practical Example: How a Rate Change Flows Through

Let’s say you have a $600,000 mortgage at 6% interest, with monthly repayments of about $3,600.

• If the RBA cuts the cash rate by 0.25% and your bank passes it on in full, your mortgage rate drops to 5.75%.

• Your new repayments fall to around $3,500—saving about $100 per month.

  
  

That extra money might be spent on groceries, eating out, or paying off other debt—injecting more demand into the economy.

On the other hand, someone with $100,000 in a term deposit would see their interest income fall by $250 per year, reducing their spending power.

This balancing act is exactly what the RBA aims to manage.

Why Don’t Banks Always Match the RBA’s Moves?

Sometimes, banks move their rates independently of the RBA. This can be frustrating for customers who expect rate cuts to fully flow through. Reasons include:

• Funding mix – Banks don’t just rely on the overnight market; they also borrow from overseas markets or through term deposits, which may not move in line with the cash rate.

• Profit margins – Banks must remain profitable, so they may choose to retain some of the benefit of lower rates.

• Competition – If one bank doesn’t pass on the cut, another might, forcing adjustments.

• Regulatory settings – Requirements for capital and liquidity can influence pricing decisions.

So while the cash rate sets the direction, the exact interest rates consumers face reflect broader market forces.

Beyond Mortgages: Other Rates Affected

The influence of the cash rate extends far beyond home loans.

1. Personal Loans & Credit Cards – These often carry higher fixed margins, but they still move loosely with the cash rate.

2. Business Loans – Companies’ access to finance is directly affected, shaping their hiring and investment decisions.

3. Deposit Rates – When the cash rate is low, savers suffer with very low returns. When rates rise, depositors benefit.

4. Exchange Rates – Higher Australian rates can attract foreign investors, pushing the Aussie dollar higher. Lower rates can weaken the currency, which impacts exporters and importers.

   
   

What Happens When Rates Stay Too High or Too Low?

• Rates Too Low for Too LongCheap borrowing can fuel excessive property price growth, risky lending, and inflation. This was a concern in the years after the Global Financial Crisis when rates stayed low worldwide.

• Rates Too High for Too LongExpensive borrowing can choke spending, discourage business growth, and trigger recession. Households with large mortgages are particularly vulnerable, as seen during recent rate hikes.

This is why the RBA must tread carefully, adjusting rates gradually and watching how households and businesses respond.

The Global Connection

Although the RBA focuses on the Australian economy, global events play a huge role.

• US Federal Reserve – If US rates rise significantly above Australian rates, international investors may shift money to the US, weakening the Aussie dollar.

• Global Inflation Trends – Energy prices, supply chain disruptions, and wars can all force the RBA’s hand.

• Investor Sentiment – If global markets are nervous, the RBA may lean toward supportive policy even if inflation is moderate.

  
  

Key Takeaways

1. The RBA cash rate is the wholesale overnight interest rate between banks.

2. Bank interest rates are the retail rates for borrowers and savers, influenced but not dictated by the cash rate.

3. When the RBA changes the cash rate, it ripples through the financial system—affecting mortgages, loans, deposits, and the broader economy.

4. The RBA moves rates mainly to manage inflation, employment, and economic stability.

5. Banks may not always move in lockstep with the RBA due to funding costs, competition, and profit considerations.

6. Rate changes are a balancing act—stimulating growth when needed, or cooling the economy when it overheats.

   
   

Final Word

Understanding the link between the RBA cash rate and bank interest rates gives you a clearer picture of why your mortgage repayment changes or why your savings account earns more (or less). While the RBA’s decisions can sometimes feel distant or abstract, they flow directly into household budgets, business investments, and the health of the entire economy.

Next time you see a headline about the RBA adjusting the cash rate, you’ll know it’s not just a technical number—it’s a signal that ripples through every corner of Australia’s financial system.