First up: Who or what is the RBA?
The RBA is the Reserve Bank of Australia. It’s not a bank you’ll see down the shops (that’s a retail or commercial bank), it’s what we call a “Central Bank”. And most countries or unions (like the European Union) have one.
A central bank’s main job is to monitor and look after our economy. Think of the RBA as an #InstagramInfluencer with a really decent following (the whole of Australia). The influencer (the RBA) does certain things on their Instagram to change what their followers (other banks) do, right?
That’s basically what the RBA does but with money. This includes influencing things to make sure our currency is stable (so bread doesn’t cost $1m even though some artisan bread feels like it does), that the economy is growing so we can all have jobs (woo) and ensure money is flowing in and around Australia.
They meet to discuss this every month and that’s when they set what the news call the ‘cash rate’.
Sounds important, right? It is!
Why does RBA decide such a newsworthy number?
The RBA decides the cash rate because their job is to set the Monetary (fancy word for everything to do with money) Policy in Australia.
The cash rate is the rate banks pay one another for overnight loans.
The RBA uses the cash rate to influence the overall level of interest rates that apply in the economy (this is the Monetary Policy bit). The team at the RBA use the target cash rate set by its Board to determine the rates it pays banks for money held with the RBA on a day to day basis. This has a flow on impact to other interest rate levels.
But… how does that all work?
Think of it like this: Pretend the RBA owns the only flour mill in the country.
They set the price of the flour each month. That means, each month, it’ll affect
- the price of the flour in supermarkets
- what restaurants and bakeries pay to purchase flour
- and the price of the products they use flour in
As the price of the flour affects all these different things, the price of the ‘end product’, artisan bread, may go up or down.
In this case, the artisan bread could be a home loan or a savings account.
Generally, when the economy is not going well the RBA sets the cash rate lower hoping that people will spend less on interest payments on their home loan and more on actual things (like artisan bread!).
If the economy’s going well and people are spending so much that the price of things is going up (inflation ), the RBA will set the cash rate higher to try to reduce people’s spending power and prices going up too high .
TL;DR: The RBA use this rate, through a complex chain of other things, to influence the rates banks provide to people in Australia.
So, you get your money from the RBA?
No, not at Bank Australia. The main thing to know is that the cash rate the RBA set and the interest rate we provide you aren’t directly related. That’s not quite how it works.
We don’t borrow money from the RBA at the cash rate. Our primary source of funding is from customers who leave their money in the bank (depositors). We also get some of our funding from wholesale investors (such as fund managers and other banks) who invest in our bonds.
To add to all that, we also use the bank’s own funds we’ve accumulated in the 60 years we’ve been operating.
What does the cash rate mean for me then?
So, when the RBA changes the cash rate, it has some influence on the rates we charge borrowers and pay to depositors.
That means it’s most likely going to change your current (variable) home loan rate and the home loan rates we offer new customers and the interest rate on your savings account.
Generally, when the RBA cash rate is higher, our lending and deposit rates will be higher. The same applies when the RBA cash rate is lower; our lending and deposit rates will be lower.
What a rollercoaster!
Disclaimer! The information provided is general information and is an opinion only. We cannot guarantee its accuracy. It is not advice. You should not rely on it to make decisions. If you need specific advice on your circumstances or finances you should speak to an expert. You might need legal or accounting or other specialist advice. It depends on your personal circumstances. The information provided about Bank Australia is true and correct as at the date of publication.