RBA abandons patient stance in post-budget meeting

The cash rate is the market interest rate on ‘overnight’ funds. These are the funds that banks regularly lend to one another to cover their daily cash needs.

When the RBA changes its cash rate target, it shifts the economic mood in ways that are believed to affect spending, investment, inflation and employment. 

For example, if the demand for goods and services is too high relative to production, the RBA might decide to lift the cash rate. Households with debt obligations will then have to rein in their spending, relieving some of the pressure on inflation.

If, however, the economy is underperforming and demand is low, the RBA might lower rates to encourage more spending, borrowing and investment, giving the economy the boost it needs.

Variable mortgage rates tend to move in line with the cash rate, which means that if the cash rate goes up, you can expect lenders to raise their variable rates by roughly the same amount. 

That said, the cash rate is just a baseline, and differences in operating costs (staff, branches, marketing and interest paid out to customers) mean lenders can raise or lower their rates at any time to meet their business needs. 

Right now, the average variable rate mortgage (OO, P&I) among lenders we track sits at 3.03% p.a. On a $400,000 mortgage taken out over 25 years, that translates to monthly repayments of around $1,900.

Assuming the cash rate sits at 1.75 per cent by year’s end (as currently predicted by Westpac) and variable rates rise at the same pace, the average borrower’s repayments would be around $360 higher each month, or $4,332 higher over the year.

To work out how much you could be paying if rates go up, use our home loan repayments calculator.

Less accommodative monetary policy tends to have a dampening effect on property prices, as the higher cost of borrowing deters many hopeful buyers from entering the market.

The RBA’s dovish stance makes it a bit of an outlier when compared to many of its central bank peers, who have been much more jittery in the face of runaway inflation.

The US Federal Reserve increased its benchmark short-term interest rate on 16 March, while also laying the groundwork for another six interest rate hikes over the year.

Fed Chair Jerome Powell, who claimed back in December that rates in the US would only rise three times this year, explained the shift by stressing the need to pursue price stability. 

The following day, the Bank of England raised interest rates from 0.50 per cent to 0.75 per cent, walking back previous comments that suggested a more cautious approach was necessary.

Meanwhile, the Reserve Bank of New Zealand kick-started its tightening cycle back in October last year, and has made a total of three 0.25 per cent hikes so far.

But not all central bankers believe that raising rates is appropriate right now. Bank of Japan Governor Haruhiko Kuroda recently ruled out tightening monetary policy to combat surging food and fuel prices, saying the move would hamper wage growth.