What a beautiful day it is to be talking about cash rates.

In case you missed it (or looked away, which I’d also understand), the Reserve Bank of Australia announced this week it was lowering the cash rate for the first time since 2020.

If you’re not quite sure what that means or why it happened, this is the newsletter for you!

Today, we’re discussing what the cash rate actually is and how it will affect you (whether you have a mortgage or not).

The cash rate is the rate of interest the Reserve Bank of Australia (RBA) charges commercial banks to borrow money. The RBA, by the way, is the central bank responsible for ensuring Australia has a stable economy, and that prices aren’t growing too quickly.

One of the RBA’s main responsibilities is to make changes to the cash rate with the expectation that banks will pass any changes on to their customers, such as for mortgage loans – that’s why we usually refer to the cash rate as ‘interest rates'.

It impacts two main things: the cost of borrowing money, and the rate of interest on savings.

The higher the interest rate, the more expensive it is to borrow money. On the other hand, the higher the interest rate, the more interest you receive on savings.

The purpose of the cash rate is to stabilise inflation. If inflation starts getting too high (as it has been in recent years) the RBA often increases the cash rate to stop it from getting even higher.

How does that work? Well, when interest rates are higher, the result is that borrowing money becomes more expensive for everyone. If it’s more expensive, people are less likely to borrow. If people borrow less, they have less to spend, and there’s less demand to push up inflation.

There’s no getting around it – this stuff can make your head hurt. But the long and the short of it is this: interest rates are an important tool for central banks to fight inflation. They are like medicine for inflation. However, it’s painful medicine. It makes anyone with a mortgage, or another kind of loan, pay more, which can be very difficult for many.

So what happened this week?

Well, the RBA announced it was cutting the cash rate from 4.35% to 4.1%. Like I mentioned at the top, this was the first time there had been a cut to the cash rate since 2020.

The RBA Board said in their reasoning that underlying inflation (the specific measure they use for price growth) was moving towards their target range of 2-3%. It is currently just outside of that, at 3.2%, but has been on a downward trajectory since 2022. This, they said, meant we were heading in the right direction.

If you have a mortgage, I’m sure I don’t need to tell you how this will affect you. All four of Australia’s major banks – CBA, Westpac, NAB and ANZ – have said they will pass on the interest rate cuts to their customers.

To give you an idea of what this means in real terms, someone with a mortgage of $600,000 will be paying about $100 less in their monthly repayments.

But, as I also mentioned earlier, cash rate cuts are a double edged sword.

For savers, this cash rate cut is less positive – depending on your bank, you’ll likely now be earning less interest on any savings in your bank account.

Oh, if only we knew! What we do know is that the RBA is telling the public to be cautious about planning for further cuts to the cash rate just yet.

In its statement, the Board said it remains “cautious on prospects for further… easing” of the cash rate.

In a press conference, the RBA Governor Michelle also remained cautious, saying: “We have to be patient, I understand it hurts, but it’s really important that we get inflation down.”

The next decision on the cash rate is 1 April.

Before that, this Wednesday (26 February) the ABS will release the latest figures on inflation. The key is to look at the ‘underlying inflation’ rate, also known as the trimmed mean. If it’s within 2-3%, that means it will be within the RBA’s target rate for inflation for the first time since 2021.

Two people who will be keenly watching what happens next are Prime Minister Anthony Albanese and Opposition Leader Peter Dutton. Both sides of politics will be looking to make the election about their credentials when it comes to managing the economy, which could be made easier (or harder!) depending on future RBA decisions.

We’ll be sure to keep you (and your hip pocket) updated as we learn more.

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