What is the cash rate?

The cash rate is the interest rate banks charge each other to borrow money overnight. The Reserve Bank sets a target for it, and because it sets the base cost of money in Australia, changes to it flow through to nearly every loan and deposit rate.

Who decides the cash rate?

The Reserve Bank's Monetary Policy Board. It meets eight times a year and announces each decision with a statement explaining its reasons. It operates independently of the government and does not take instruction from it on interest rates.

Does the cash rate set my home loan rate?

Not directly. Each lender sets its own rates and decides whether to pass on a change, by how much and from when. Most variable rates follow the cash rate closely. Fixed rates are priced on where lenders expect rates to go, so they often move before a decision rather than after it.

What happens when interest rates go up?

Repayments on variable rate loans rise, usually within a few weeks of a decision, and borrowing becomes more expensive. Deposit rates tend to rise too, though often more slowly and by less. Over time, the higher cost of borrowing is meant to slow spending across the economy so that inflation eases.

Why does the RBA raise rates when people are already struggling with the cost of living?

The RBA has said high inflation hurts all Australians and is especially tough on people with lower incomes, and that if it becomes embedded in prices and wages it would take even higher rates, for longer, to bring it down. Raising rates is meant to slow spending enough that price rises ease. The trade-off is that the cost falls heavily on households with large mortgages in the meantime.

What data does the RBA use to make its decision?

The Board looks at inflation, unemployment, wage growth, household spending, economic growth, housing and lending, business conditions and the global economy. Much of this comes from Australian Bureau of Statistics releases, including the Consumer Price Index, the Labour Force survey, the Wage Price Index and the National Accounts. It also draws on its own conversations with businesses and its forecasts for the economy.

How long does a cash rate change take to work?

RBA estimates suggest it can take between one and two years for a change to have its full effect on the economy. Loan repayments change within weeks, but the effect on spending, jobs and inflation builds up slowly.

How the RBA decides interest rates: the cash rate explained

The cash rate is one number set by the Reserve Bank, yet it influences nearly every interest rate in Australia. This guide explains what the Reserve Bank is trying to achieve, the data it watches before each decision, how a change reaches the rates people actually pay and earn, and the trade-offs that come with raising or cutting.

What the cash rate is

The cash rate is the interest rate banks charge each other to borrow money overnight. The Reserve Bank of Australia (RBA) sets a target for it, and it is the main tool the RBA uses to steer the economy.

Very few people borrow at the cash rate itself. What matters is that it sets the base cost of money in Australia. When it moves, the rates banks pay to raise funds move with it, and those costs are passed on to the rates on home loans, savings accounts, term deposits and other products. That is why a single announcement from the RBA can change the repayments of millions of borrowers.

Decisions are made by the RBA's Monetary Policy Board, which meets eight times a year. It operates independently of the government of the day and does not take instruction from it on interest rates. The Board publishes a statement explaining each decision, usually at 2:30pm on the second day of the meeting.

Source: RBA.

What the RBA is trying to achieve

The RBA's goals are set out in law. When it sets the cash rate, it must aim for two things: price stability and full employment. The RBA describes both as part of a wider goal of supporting the economic prosperity and welfare of Australians.

Price stability means keeping inflation, the rate at which prices rise, low and predictable. The RBA's target is inflation of 2 to 3 per cent a year, and it aims to bring inflation back to the 2.5 per cent midpoint of that range. A little inflation is considered healthy. Too much erodes what wages and savings can buy, and makes it hard for households and businesses to plan.

Full employment does not mean everyone has a job. The RBA defines it as the highest level of employment the economy can sustain without pushing inflation up. If unemployment falls too far, businesses compete for scarce workers, wages rise quickly, and those costs flow into prices.

Most of the time the two goals pull in the same direction. When they conflict, the Board decides how to balance them and how quickly to bring inflation back to target.

The data the Board watches

There is no single formula behind a decision. The Board weighs a wide range of information, and its meetings follow the release of key data on inflation and economic activity. The main inputs are:

Inflation. The Consumer Price Index (CPI), published by the Australian Bureau of Statistics (ABS), tracks the price of a typical basket of goods and services. Since November 2025 the ABS has published a complete CPI every month, alongside the quarterly figures. The RBA pays close attention to the trimmed mean, a measure of underlying inflation that strips out the biggest price rises and falls each period, so one-off swings such as a fuel price spike or a government rebate carry less weight.
Jobs. The ABS's monthly Labour Force release reports the unemployment rate and how many people are in work. The RBA also watches job ads, hours worked and how hard businesses say it is to find staff.
Wages. The ABS's quarterly Wage Price Index shows how fast pay is rising. Fast wage growth without matching gains in productivity can feed into prices.
Spending and growth. The ABS's National Accounts report growth in the economy each quarter, and its monthly Household Spending Indicator shows how much households are spending.
Housing and credit. House prices, new home lending and how quickly debt is growing all show how earlier rate changes are flowing through.
What businesses are saying. The RBA runs a liaison program, meeting with businesses across the country to hear about costs, prices, hiring and investment plans. It also follows private surveys of business and consumer confidence.
Inflation expectations. If households and businesses expect prices to keep rising quickly, they tend to act in ways that make it happen, such as asking for larger pay rises or lifting prices early. The RBA tracks surveys of these expectations closely.
The global economy. Conditions overseas, energy prices, the Australian dollar and interest rate moves by other central banks all affect what happens here.

Four times a year the RBA also publishes its Statement on Monetary Policy, which sets out its forecasts for inflation, unemployment and growth. The Board makes each decision based on where it expects the economy to be heading, not just where it is today.

How a change reaches your interest rates

The cash rate does not set your rate directly. Each bank decides whether to pass on a change, by how much and from when. In practice, different products respond in different ways.

Variable home loans usually follow the cash rate closely. Lenders tend to announce their changes within days of a decision, with new rates starting a week or two later. As an example, on a $600,000 loan over 30 years at a variable rate of 6.63%, a 0.25 percentage point rise adds about $100 a month to repayments.
Fixed home loans are priced on where lenders expect rates to go over the fixed term, so they often move before a decision rather than after it. Repayments on an existing fixed loan do not change until the fixed term ends.
Savings accounts tend to follow more slowly, and often by less, than loan rates. Bonus rates are usually where a change shows first.
Term deposits are priced on expectations, much like fixed loans. A new term deposit reflects the rates on offer when it opens, and an existing one keeps its rate until it matures.
Credit cards are priced well above the cash rate and their rates tend to move little, if at all, when it changes.
Personal loans are also priced well above the cash rate, and their rates usually move by less than it does. A fixed rate personal loan keeps its rate for the life of the loan.

You can follow the current cash rate and see how far each market sits above or below it on our Rate Tracker, and compare products on our Home Loans, Savings Accounts and Term Deposits pages.

Why the RBA raises or cuts interest rates

A change in the cash rate works by changing how much people and businesses spend. The RBA describes several ways this happens.

When the RBA raises the cash rate, it is trying to slow spending so that inflation comes down. Higher repayments leave borrowers with less money to spend. Higher deposit rates make saving more attractive than spending. Borrowing for a home or a business expansion becomes more expensive, so less of it happens. Higher rates also tend to cool house prices and lift the Australian dollar, which makes imports cheaper. With less demand across the economy, businesses find it harder to raise prices, and inflation eases.

When the RBA cuts the cash rate, it is trying to do the opposite. Lower repayments free up money for borrowers to spend, saving becomes less rewarding, and borrowing to buy or invest becomes cheaper. More spending supports business activity and jobs, which matters most when the economy is slowing and unemployment is at risk of rising.

None of this happens quickly. RBA estimates suggest it can take between one and two years for a change in the cash rate to have its full effect on the economy. That is why the Board sets rates based on its forecasts, and why it will sometimes move before inflation or unemployment has clearly changed direction.

The trade-offs on both sides

Interest rates are the RBA's main tool, and the approach has both strengths and costs. People's views on it often depend on whether they are borrowing or saving.

Raising rates

The case for: high inflation hurts almost everyone, and the RBA has said it is especially tough on people on lower incomes, because the price of essentials rises faster than their income. Acting early can stop high inflation from becoming built into wage and price expectations, which would take even higher rates to undo later. Savers and retirees who live off interest also earn more.

The case against: the cost falls heavily on households with large mortgages, often younger families who bought recently. If rates rise too far or stay high too long, businesses cut back and people lose jobs. And rate rises do little about inflation that starts overseas, such as an oil price shock. They work by reducing demand at home rather than fixing a shortage of supply.

Cutting rates

The case for: lower rates ease pressure on borrowers, support business investment and help protect jobs when the economy weakens. Because so many Australian home loans are on variable rates, a cut reaches household budgets quickly.

The case against: savers and retirees who rely on interest income earn less. Cheaper borrowing can push up house prices, which helps existing owners but makes it harder for first home buyers to get in. Cutting too early or too far risks inflation picking up again, and a lower Australian dollar makes imported goods more expensive.

The approach as a whole

Supporters point out that one tool, set by an independent board, reaches the whole economy quickly and without a new law or budget. A clear inflation target helps anchor what people expect prices to do, which makes the target easier to hit.

Critics argue the cash rate is a blunt tool. It affects every borrower and saver at once, whether or not their part of the economy is overheating, and its effects arrive with a long and uncertain lag. Because Australia has a high share of variable rate home loans, the burden of a rate rise falls mostly on mortgage holders rather than being shared evenly. Some argue government spending, tax settings and housing supply have as much influence on inflation and the cost of living as the cash rate does.