Cash Rate Update (10th of December 2024)

What is the RBA cash rate today?

In the latest Reserve Bank Australia (RBA) meeting on Tuesday the 10th of December, the RBA decided to leave the current cash rate unchanged at 4.35 per cent.

Introduction to the RBA cash rate

More recently you have probably heard a lot more about the cash rate, RBA cash rate, Australian cash rate, cash rates vs interest rates, etc. The purpose of this article is twofold:

1. Give you an update on the latest status of the cash rate (above, in case you know everything you need to know about the RBA cash rate)
2. Explain in layman’s terms key items regarding the RBA cash rate

First and foremost, you may be wondering why so much noise, headlines, etc. are surrounding the RBA cash rate? Firstly, RBA is an acronym that refers to the Reserve Bank of Australia. Throughout this article when we talk about this institution we will refer to it as the RBA.

The RBA is Australia’s central bank. To avoid making this article too technical, the RBA has one key duty: “to contribute to the stability of the currency, full employment, and the economic prosperity and welfare of the Australian people. This video features Michelle Bullock the Governor of the RBA explaining the role and functions of the RBA for those of you that are interested.

When does the RBA meet and decide on cash rate movement (if any!)

The meeting to determine current cash rate movement occurs the first Tuesday of every month (excluding January). In the monthly meetings the cash rate position either goes up, goes down or stays the same. Since March 2020 the cash rate has moved 14 times. In November 2020 the cash rate reduced by -0.15 basis points to 0.10%, since then in 13 separate months the cash rate has risen +4.25 basis points to 4.35%.

As you can see in Graph 1 below, there is no set rules for which way the cash rate will move or by how much. This depends on a multitude of economic factors.

Graph 1

RBA cash rate explained
 

One key thing that creates a lot of confusion is the cash rate vs the interest rate. These are two completely different things. Firstly, the RBA cash rate refers to “The interest rate which banks pay to borrow funds from other banks in the money market on an overnight basis.” Or more simply, what the bank pays to get its hands on money to operate its own business.

Interest rates refer to the amount a lender charges a borrower and is a percentage of the principal (the total amount loaned).

A key question we hear a lot is how come the RBA cash rate is different to my interest rate? This is a normal scenario that will always be the case. As outlined above all banks need to secure their own capital (money) to run their business, and the RBA cash rate is reflective of what rate the bank pays to secure their money.

Based on the rate a bank pays, the amount you pay on your home loan will always be higher, as the difference is the cost of doing business for the bank. But why is the different so big? The gap needs to cover the risk to the bank to lend money, and the cost to the bank to operate on a day to day basis (staff, operations, etc). In summary, you cannot forget banks would not be banks, unless they actually made some money!

The Reserve Bank of Australia (RBA) and banks

The RBA and banks are completely separate businesses. What the RBA does is independent of what a bank does. Just because the RBA moves their rates, does not necessarily mean a bank has to do the same. Banks work in a competitive environment, and the interest rate changes they make to their customers is their choice and can be influenced by a multitude of factors. So, whether a bank mimics what the RBA does at each meeting is completely up to them. On most occasions the bank interest rate will move in a similar direction, however the amount can be different. Also, do not assume your bank will adjust interest rates after the RBA do. As outlined, they are completely independent operations, and if a bank decides to change rates more frequently, this is completely up to them. If you want to make sure your rates is competitive, make sure you do a regular health check on your loan.

What results in the RBA cash rate moving?

The short and easy answer is the economy!

If you want the longer version it is a multitude of factors, including (this list by no stretch is exhaustive) inflation; world events e.g. war; supply & demand challenges, labour market; natural events e.g. floods; etc. etc.

The difference between a Bank Loan Manager and a Mortgage Broker

Who you secure your home loan with is completely up to you. Whilst this section of the article is not directly related to the topic in hand, we feel this may be of value. A Bank Loan Manager is an employee of the bank directly. They will only attempt to provide you with a loan from that particular bank. There skill is finding the best home loan product they have for you, among the array of offerings they have available. For example, a Westpac employee will not provide you a loan from the National Australia Bank (NAB). This would be no different that a Holden dealership, would not sell you a brand new Hyundai car.

A mortgage broker is someone that can help find you a suitable loan from multiple banking institutions. Dependent on how they are set up, they can take into consideration products from more than one bank!

Terms Explained

LVR (Loan to Value Ratio) – this is the percentage of debt to your asset value. The higher the percentage the greater the risk you pose to a bank. Or in simple terms, the more you are looking to borrow of the total amount, the higher a risk you are and this will be factored into the loan product you seek to secure to allow you to buy a home.

The RBA cash rate and Australian cash rate – mean EXACTLY the same thing. One term refers to the institution who determines what the cash rate is, the other term (Australian cash rate) just talks about the item at a national level.