When following financial news or reviewing your home loan, you’ll frequently encounter two key terms: the cash rate and interest rates. While interconnected, these rates play distinct roles in Australia’s financial system. Understanding their differences helps explain why your mortgage repayments might change even when the official rate stays steady.

The Role of the Cash Rate

The Reserve Bank of Australia (RBA) determines the cash rate, which represents the interest charged when banks lend to each other overnight. This benchmark rate serves as the RBA’s primary tool for managing economic conditions. When inflation rises, the RBA may increase the cash rate to encourage saving over spending. Conversely, during economic slowdowns, a lower cash rate makes borrowing cheaper, stimulating activity across the housing market and broader economy. The RBA reviews this rate monthly, with changes typically influencing how banks set their interest rates for products like home loans and savings accounts.

How Lenders Set Interest Rates

While the cash rate provides direction, individual banks determine their own interest rates based on several factors beyond the RBA’s decisions. Funding costs from international markets, competitive pressures, and profit margins all contribute to how much lenders charge borrowers. This explains why different banks might offer varying rates on similar products, and why mortgage rates don’t always move in lockstep with RBA announcements. For borrowers, this means your home loan interest rate reflects both macroeconomic policy and your lender’s specific business considerations.

Practical Implications for Homeowners

The relationship between these rates directly impacts your mortgage. Variable-rate loans typically follow cash rate movements—rising when the RBA increases rates and falling when cuts occur. Fixed-rate mortgages, however, remain unaffected during their locked term, though they’ll adjust to current market rates upon renewal. Savers also feel these changes, with higher cash rates generally improving returns on deposits and lower rates reducing them.

Why Rates Don’t Always Align

You might notice banks adjusting interest rates independently of RBA decisions. This occurs because lenders face different funding costs in global markets and must balance competitive offerings with financial stability. Some institutions may absorb part of a cash rate change to attract customers, while others might adjust rates based on their risk assessments or profitability goals.

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