 Eight times a year the Reserve Bank of Australia meets to discuss monetary policy, and by 2:30pm that day your mortgage repayments may be set to rise or fall. So, what is the RBA, why do they control my mortgage repayments, and what is it all supposed to achieve? What is the RBA? The Reserve Bank of Australia is the countries primary bank. It controls Monetary Policy (such as increasing the cash rate, and therefore your mortgage interest rates) to achieve price stability and maintain full employment in Australia. They meet eight times a year to discuss this policy and if they need to alter the cash rate. What is the Cash Rate?  The cash rate is the interest rate banks use to borrow funds from other banks. For our purposes, you just need to know that the Cash Rate influences all other interest rates such as mortgage and deposit (bank account) rates. This then feeds into the economy at large, impacting economic activity, employment, and inflation. Why do they increase the Cash Rate? By increasing the cash rate (and therefore all interest rates) the RBA hopes to raise the cost for borrowing and lower the demand for goods and services (i.e. to keep inflation in check). In summary, loans become more expensive, preventing people from borrowing money, encouraging saving, and therefore lowering the demand for consumer goods. Why is it important that inflation stays manageable? Inflation occurs when the general prices of goods and services (groceries, fuel, etc) increase, essentially decreasing the buying power of money. One of the biggest examples of this was Zimbabwe’s economy in 2008. Inflation rose so sharply that the price of goods roughly doubled every 24 hours. For context, the RBA attempts to keep inflation between 2-3% (to varying degrees of success). The last reported rate was 3.7% for the 12 months preceding February 2026. Zimbabwe’s rate of inflation was 79,600,000,000% p.a as of June 2008 and led to the “one hundred trillion dollar” note pictured below.  The cost of goods were so high that people carted their money around in trollies to go buy essentials like groceries or clothing. This is an extreme example, but shows the importance of keeping inflation within acceptable rates. How does this impact my mortgage? If the RBA decides to increase the cash rate, your borrowing capacity decreases. This primarily impacts new borrowers who are establishing their loan or existing mortgage holders looking to refinance or take out equity. Perhaps the biggest impact is on existing borrowers on variable interest rates, as their monthly repayments will increase. This is by design; it is how the RBA controls the cost of goods. The idea is that you will spend less, thereby decreasing demand, and save more, thereby decreasing spending. If the Cash Rate is lowered, your interest rate will go down but may not automatically lower your repayments. In those cases you will need to contact your bank to arrange for a recalculation of your interest rate. Is it working?  Inflation has risen rapidly since 2020, and so the RBA is trying to resituate the rate in the target range. The impacts of the recent rate hike on inflation will emerge as we go. The RBA are set to meet on the 5th of May 2026 to reassess the Cash Rate. Interested in learning more?
Comments are closed.
|
