The Reserve Bank of Australia sets the official cash rate target. This is a benchmark rate that has a big impact on home loan interest rates, savings accounts and other credit products.
On 04 July 2023 the RBA held the official cash rate at:
The RBA's next interest rate decision is on:
01 August 2023
Of the experts surveyed by Finder for August:
72% predict a rate hold
The latest cash rate analysis from the experts
Finder regularly surveys 40+ economists and property experts to forecast the RBA's next cash rate decision and get insights into the future of the Australian economy. Here are the most recent cash rate predictions.
The RBA is close to finishing its tightening cycle, as is the Fed. The next few RBA meetings will continue to be data driven. We expect to see the June quarter CPI continue to trend down, which will enable the RBA to stay on hold in August.
The latest quarterly and monthly CPI data provide further evidence that inflation, though still "too high", is on its way down towards the RBA's target. However with the labour market still very tight, the RBA will be paying attention to any indication of an acceleration in labour costs, and will need to see some easing in labour market conditions before it can contemplate any reductions in interest rates.
The Q2 CPI print surprised to the downside, showing a welcome moderation in services inflation. While the outlook for unit labour costs is still concerning over H2 2023, we think the disinflation in the headline measure likely buys the RBA some time to continue to 'wait-and-see'.
The RBA is expected to put a pause on its cash rate hike in August, not primarily because of falling inflation but rather due to the upcoming appointment of a new Governor Bullock, who will take office in September. As the outgoing Governor's tenure comes to an end, there might be less pressure on Governor Lowe to raise the cash rate. However, it's worth noting that despite the inflation rate of 6% in the June quarter being lower than the previous recording of 7% in the March quarter, it still remains significantly higher than the desired target range of 2 to 3 percent. The gradual decline in the overall inflation figure indicates that the previous cash rate hikes have been effective in curbing the overall price level. Upon closer examination of the CPI figures provided by the ABS, it becomes evident that two essential household categories continue to experience high prices. Housing costs have remained at a significant level of approximately 8.1%, while food and non-alcoholic beverages have increased by 7.5%, thus impacting the overall cost of living index for vulnerable households in Australia. Considering this situation, the RBA may consider implementing one or two additional rate hikes in the future if inflationary pressures on these essential items persist. However, any decisions on rate adjustments would likely depend on the economic developments and the effectiveness of previous measures.
Headline and underlying measures of inflation have peaked in Q1 and are all tracking lower in Q2. Also, the monthly measure of CPI continues to show substantially lower inflation at 5.4% year-ended for June. Given this, I think the RBA will hold rates. There are likely some concerns on the Board that services inflation is higher at 6.3% year-ended for Q2. But I also think that the Board will likely wait until the new Governor commences in that role before the October meeting to make any surprise moves of tightening and only if there are other indicators such as a substantial rebound in monthly inflation, which I don't expect to happen. The RBA will likely cite continued impacts of past hikes and increasing real interest rates as inflation falls as reasons to hold at this meeting.
What goes up must come downâ€”and Aussie inflation is coming down fast. Last month, we put the chances of a further interest rate hike at slightly greater than even odds. The June inflation data has tipped those odds the other way. The narrow path to a soft landing remains precarious, but it is less perilous than it was just a handful of months ago. Inflation will track lower from here. By the end of the year, we see inflation sitting at 3.9% y/y. It should return to the RBAâ€™s 2% to 3% target band by the September quarter of 2024â€”almost a year ahead of the RBAâ€™s projections.
The latest data from the Australian Bureau of Statistics showed that inflation slowed in the June quarter, with the lowest quarterly rise since September 2021. This information should give the Reserve Bank space to keep the cash rate on hold in August.
Inflation appears to be moderating more quickly than expected. However, it still remains significantly above the Bank's target range. There is still upside risk to rates especially if inflation stagnates above the 2-3% target.
Inflation seems to be falling faster than many expected, giving the RBA room to pause and assess the impact of their previous rate hikes, which take time to feed through to the economy. However, wage growth relative to productivity is still a cause for concern.
Inflation has slowed down in the past six months, suggesting that previous interest rate rises are having an effect. The RBA has indicated that they are likely to pause increases in interest rates to see the effect on inflation. So far it looks like previous rate hikes are working.
Recent data shows a slow down in inflation. Unemployment rate is still low but we do not observe substantial increases in wages. Other macroeconomic indicators suggest a slow down in the economy. As the full effect of the recent monetary policy measures is still passing through, the RBA may consider holding the cash rate.
Quarterly CPI inflation is 0.8% for the April - June quarter. Annual inflation is 6% over the year to June. We have seen the peak of inflation (which is 7.8% in December). The inflation is coming down much more quickly than expectation. The chance of RBA increasing the interest rate in Auguest is low.
Thereâ€™s likely to be one more interest rate increase given that inflation has printed at 6% in the last month. The RBA has repeatedly pointed out that it will do whatever it takes to get the inherent inflation rate back down into their target range so that it does no further long-term economic damage to the economy.
The RBA board are still likely to tighten policy further but the Q2 inflation data offers the opportunity to extend last month's pause and gather further data. Tight labour markets and stubborn services inflation adds to upside risks, but another pause would be welcome.
Both headline and underlying inflation for Jun 23 has come in lower than the RBA's current forecasts. Even though services inflation is strong year-on-year it has slowed over each of the past two quarters which should, in my mind, be enough evidence for now that rate hikes are working and inflation is slowing, resulting in a pause.
The latest quarterly CPI stats show that the growth in inflation has eased and come in under the RBA's forecast. Even though job numbers in June came in surprisingly strong, the RBA now has less pressure to raise rates again
The rate of change for inflation is now negative indicating that inflation is slowing. Prior rate increases are now biting and the RBA may wish to wait to see the impacts of these play out given monetary policy lags.
I think the Reserve Bank would be looking for an excuse to put rates on hold given the amount of anecdotal evidence that the interest-rate rises are having some effect on consumer spending. However, July has been a big month for price increases, but they are not reflected in last weeks CPI figures. But they will be in play at next months board meeting. So my view is hold this month but increase next month. We are not out of the woods yet.
Inflation is falling and there is contractive force in the economy from previous cash rate increases that havenâ€™t been fully felt yet.
What is the official cash rate?
One of the Reserve Bank's primary roles is setting monetary policy for the Australian economy. This involves setting the cash rate (or to use its full name, the official cash rate target).
At a technical level, the cash rate is actually the interest rate banks pay for borrowing money from each other overnight. Banks use this to manage liquidity and issue funds as needed.
Australian banks can borrow and deposit money with the RBA at just below the current cash rate target.
How the official cash rate target affects interest rates
But for the average Australian consumer, the cash rate is really useful as a broad benchmark for the interest rates on home loans and savings accounts. A high cash rate makes borrowing money more expensive and sees home loan repayments rise.
A low cash rate makes it cheaper to borrow money. This boosts borrowing and spending.
How has the cash rate changed over time?
The Reserve Bank adjusts the official cash rate target over time in response to various economic data, including:
The unemployment rate
Global economic factors
The cash rate stayed at the then record low of 1.50% from 2016 to 2019, when the RBA lowered it further in response to low inflation and slightly higher unemployment.
Then as the Covid-19 pandemic began to hurt the Australian economy the RBA dropped the cash rate even further. This was to make borrowing cheaper and stimulate a struggling economy. The cash rate hit the record low of 0.10% during this time.
Now, with inflation soaring the RBA has lifted the cash rate very quickly to try to slow demand and curb price rises.
The graph below shows the lowest home loan rates in Finder's database each month. These rates fall or rise broadly in line with changes to the official cash rate.
How does the RBA's cash rate decisions affect your finances?
The RBA can do 3 things with the cash rate: Raise, lower or hold the cash rate at its current level.
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Enter your loan amount, current interest rate and the latest cash rate increase to quickly estimate how much your monthly repayments will increase.
Example: how changes to the cash rate can change your loan repayments
You have a $450,000 home loan with a variable interest rate of 5.00%. It's a 30-year loan term with principal-and-interest repayments.
Your monthly repayments are $2,416.
⬆️ If the cash rate rises by 25 basis points your interest rate would increase to 5.25%. Your monthly repayments would now be $2,485. This would cost you an extra $69 a month or $828 a year.
⬇️ If the cash rate decreases by 25 basis points your interest rate would fall to 4.75%. Your monthly repayments would now be $2,348. This would save you $68 a month or $816 a year.
More questions about the RBA cash rate
Lenders are free to change interest rates on their products whenever they want. The cash rate is a big influence on rates, but there are many other factors. This includes a lender's own funding costs, the amount of deposits the lender has and how competitive it wants to be to attract new customers.
The RBA changes the cash rate target based on a range of factors including inflation, the performance of the Aussie dollar, unemployment, the housing market, and Australia's Gross Domestic Product (GDP).
For example, if inflation rises above the target rate it means that Australians are spending their money too freely and prices are increasing too rapidly. But if the RBA raises interest rates to make it more expensive to borrow money, the economy will settle and price increases will slow down.
Conversely, the RBA will drop interest rates if inflation is too low and the economy is stagnating, encouraging more Australians to spend more money and stimulate economic growth.
The Reserve Bank of Australia is the country's central bank. The RBA's monetary policy has three key objectives which are set out in the Reserve Bank Act 1959:
The stability of the currency of Australia.
The maintenance of full employment in Australia.
The economic prosperity and welfare of the people of Australia.
Setting the official cash rate is one of the bank's key tools to influence monetary policy, inflation and the broader Australian economy. The bank's board meets on the first Tuesday of every month except January to set the cash rate. The RBA will either cut, raise or hold the cash rate.
The RBA's board of governors typically meets 11 times a year, on the first Tuesday of every month except January. It is here that the board makes a decision on the official cash rate target, which it announces at 2:30pm that day.
Starting in 2024, the RBA board will meet 8 times a year to decide the cash rate level. This means fewer changes to the cash rate than in previous years.
However, the RBA can alter the cash rate at any time. This is rare, but can happen. In March 2020, in response to the onset of the COVID pandemic, the bank cut the cash rate twice. Once at the scheduled meeting and then again mid-month at a special emergency meeting.
Check out more RBA news and Finder's RBA survey press releases
Richard Whitten is a money editor at Finder, and has been covering home loans, property and personal finance for 6+ years. He has written for Yahoo Finance, Money Magazine and Homely; and has appeared on various radio shows nationwide. He holds a Certificate IV in mortgage broking and finance (RG 206) and a Tier 1 Generic Knowledge certification (RG 146).
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