For Aussies paying off their home loan, life is even more expensive after the official cash rate was raised by the RBA for the first time since November 2010. This comes at a time when the surging inflation is already putting pressure on households.
You might be wondering how all this plays into your mortgage repayments. What is going on and how can you as a homeowner mitigate its impact on your home loan?
In this article, we shall unpack some of the most common questions around cash rate Australia and interest rates Australia.
What is cash rate?
The Reserve Bank of Australia (RBA) is the central bank and banknote issuing authority of Australia. It governs the country’s monetary and economic policies in relation to its currency stability, employment levels, and economic welfare.
The RBA sets a metric called cash rate which represents the interest that lenders and banks have to pay on the money they borrow.
It is also referred to as the “overnight money market interest rate” because transfers between banks are usually processed overnight.
Official cash rate Australia history
Australia has had several highs and lows in terms of economic growth, inflation, and unemployment rates.
The 1960s was considered to be Australia’s economic Golden Age, with moderate economic reforms and low interest rates.
But the period drastically transitioned to a period of stagflation, i.e., high inflation, low growth, and high unemployment in the following decade, the 1970s. Interest rate went as high as 10.38% in July 1974 to combat soaring unemployment rates, and it stayed around this level until September 1980.
In August 2008, triggered by the global financial crisis that started in the US, mortgage rates went up to 9.62% and the official cash rate Australia was set at 7.25%.
The Reserve Bank of Australia together with the government made huge efforts to mitigate this economic meltdown, resulting in a big drop of Australian interest rates and cash rates to just 3.0% by April 2009. This quickness and decisiveness from their end saved the country from falling into recession like the rest of major developed economies during 2008 and 2009.
The official RBA cash rate Australia went up again at 7.79% in January 2011, and dropped to its lowest ever recorded point of 1.0% in July 2019. The variable home loan rates fell to under 3% that same period.
Cash rate vs interest rate
The Australian interest rate is also called the cash rate target or the official cash rate (OCR) or simply cash rate.
The interest rate is influenced by the cash rate, which as mentioned above, is the rate banks pay when they take out a loan with a maturity of one day from another bank or when they buy and sell bonds or other securities issued by the government.
Because it is the RBA that decides the cash rate, this is how they can influence the money supply. In addition, the official cash rate serves as a benchmark for interest rates Australia, and hence the interest rates for mortgages, savings, and loans.
Below is a graph of Australian interest rates / cash rates throughout the last eight years. It shows the current and historic values of the Australian Reserve Bank interest rates and cash rates.
Cash rate changes Australia
The RBA convenes every first Tuesday of the month to set and announce its decision on whether or not to change the cash rate.
So, what happens when RBA increases cash rate? A cash rate rise is meant to cool down spending activity among Australian consumers, dampening inflation in the process.
In May 2016 for example, it announced the 0.25% drop in the cash rate after keeping it steady for the last 12 months.
What does changing the cash rate do?
The RBA changes the cash rate to manage and mitigate the impacts of major economic circumstance like inflation and the COVID-19 pandemic.
Any changes made to the cash rate determine how much money banks should pay to borrow from one another. This brings us to our next topic, the interest rate.
Difference between cash rate and interest rate
With the cash rate definition often confused with that of interest rate, you may be wondering: is the cash rate the same as interest rate?
Short answer: yes and no. While cash rates impact transactions between banks, the interest rate concerns the everyday Ausralians.
The interest rate, on the other hand, is what banks charge customers on loans and other products like savings accounts and term deposits.
Let’s take a look at Australian Reserve Bank interest rates
The decisions around Australian interest rates are taken by the Reserve Bank of Australia’s Board.
Simply put, and to be crystal clear: the official interest rate is the cash rate. In determining interest rates Australia Reserve Bank is the one that banks and other lenders refer to when setting their own interest rates for the loans and deposit products they offer.
Because banks and lenders pay close attention to the cash rate when determining interest rates, it is often expected to have these two rates be the same.
Rising interest rates Australia
Australia has been combating inflation which is at a 21-year high. In 2022, the change in the cost of common household goods has shot up 5.1%.
We are seeing interest rates moving higher this year, and this trend is likely to carry over to a few more years.
Something to note: The Reserve Bank of Australia’s Board sets the official cash rate target at 2:30pm (Sydney) on the first Tuesday of the month, except January .
The market is then notified via a press release on the RBA’s Interest Rate Decisions page.
Cash rate Australia: How does cash rate affect interest rates?
The cash rate directly impacts interest rates as the banks have the liberty to pass these costs down to their borrowers via the loans and deposit products they offer. When they do, this often results in higher interest rates on your mortgage.
However, you also earn more interest on savings that you deposit on your bank.
Inversely, cash rates going down usually means lower interest rates on home loans and lower interest rates on savings accounts and term deposits. This is usually a good time for borrowers to get a better deal by refinancing.
Banks and lenders don’t need to change interest rates whenever the cash rate fluctuates, but they often take action based on moves that the RBA makes.
What is Australia’s current cash rate?
Cash rate Australia 2022: From a record-low level of 0.10% in November 2020, the RBA during its May 2022 board meeting decided to put the cash rate up to 0.35%. This is the first time the cash rate was raised in more than a decade.
Following this decision, the four major banks in the country (ANZ, Commonwealth bank, NAB, and Westpac) have announced to increase their interest rates as well. This rate hike is now currently in effect on all of their loan products.
Homeowners must brace for raised costs brought about by higher interest rates. However, they usually signal that the economy is doing well as it is in the position to deal with higher interest rates.
Curbed spending habits around discretionary items due to higher interest rates can help households save money and have sizeable buffers in their offsets. That said, some may still find an increased interest rate on their home loans more challenging than others.
Current cash rate Australia
The RBA has changed the OCR many times this year, so some people are understandably at a loss on what is the current cash rate Australia.
In 5 July 2022, the Reserve Bank of Australia has yet again lifted the nation’s official cash rate target by another 50 basis points, taking the baseline interest rate to 1.35%.
It is the third consecutive month in which the central bank has increased rates, which are now at a level not seen since May 2019.
The RBA is expected to start moving monetary policy back towards a neutral setting in the near future.
Interest rates Australia forecast: are interest rates going up in Australia?
As of 28 July 2022, the average variable mortgage interest rate sits at 3.93% while the average fixed mortgage interest rate sits at 5.19%. This is according to the latest data by Finder..
The country is entering another period of stagflation. The RBA estimates in its latest Financial Stability Review that “a 200-basis-point increase in interest rates from current levels would lower real housing prices by around 15 per cent over a two-year period”.
Rising interest rates could potentially lower house prices, and we’re seeing this trend as consumer confidence tanks to its lowest level since the 1990 recession.
On the subject of Australian interest rates, it is expected that it will rise to 2.10% by the end of the third quarter of 2022 as per the global macro models and analysts expectations from Trading Economics. A further increase can be anticipated in 2023.
Seek professional advice
For any questions you may have around your home loan, feel free to message the home loan experts at Sunshine Coast Financial Solutions.
Give us a ring on (07) 5437 9073 or schedule an appointment with us to discuss your options.
