The Reserve Bank of Australia (RBA) has announced a 50 basis points cut. For a $300,000.00 loan, the cut equates to $1,500 worth of interest savings per annum (provided the banks and lending institutions pass on the cuts). While the announcement was predominantly made to facilitate and premote recovery of Australia’s property market, much of this effort is dependant on whether retail banks actually pass on the cuts. As of the date of this article NAB and CBA have announced cuts, whether the others will follow only time will tell.
What actually is the RBA’s interest rate?
To fully understand what the RBA’s interest rates figure is, an understanding of Australia’s “cash rate” is required. The RBA’s website defines the cash rate as
So the target cash rate (and the RBA official interest rate) is the RBA’s ideal interest rate to implement monetary policy (that is to combat inflation and ensure sustainable economic growth).
How is the RBA’s interest rate (target cash rate) calculated?
How does the RBA achieve and influence the cash rate? The RBA does so by controlling the supply and circulation of funds (and securities also). The RBA controls the rate by actively trading; they buy or sell the securities and add or withdraw funds (money). With an understanding of simple economics, that is supply and demand, one can appreciate that by withdrawing funds from circulation the RBA indirectly increases the cost to obtain it. In a nutshell, when the RBA wishes to increase the cash rate/interest rate they reduce the amount of money available to banks (withdraw funds). Of course there are other influencing factors. Banks source their funds through other means as well (offshore) and this is their arguement against not passing on rates cuts.
Read more by visiting the RBA website on monetary policy.