How is the cash rate determined?

The cash rate is the official interest rate set by the Reserve Bank of Australia, and it is the single most important number in the lending market. It is the lever the RBA uses to run monetary policy — influencing aggregate demand, employment and inflation across the economy, and smoothing the business cycle. The cash rate does not set your home loan rate directly, but it moves the rates banks pay to fund themselves, which in turn shapes the lending rates they offer you. The RBA Board meets through the year to weigh the condition of the economy — growth, the labour market, inflation and a range of other indicators — and decides whether to hold, raise or cut. That decision then ripples through to mortgage rates.

The objectives behind those decisions are set out in the Reserve Bank Act 1959, which directs the Bank toward three outcomes:

Since the early 1990s the RBA has run a formal inflation target of 2 to 3 per cent on average over time. Inflation feeds straight into the cost of everyday living and into the pace of economic growth, so the cash rate is the primary tool used to keep it inside that band. Over a full cycle, inflation is intended to sit around the middle of the target rather than spike or stall.

Where the cash rate sits, and why it moves

The cash rate changes regularly, and the level matters less than the direction and the context. Australia has seen the official rate as low as 0.10 per cent and, in earlier decades, as high as roughly 18 per cent — a span wide enough to reshape what any given borrower can afford. The current cash rate is best confirmed against the RBA's published figure rather than memorised, because it is revised through the year as conditions shift.

Two forces sit behind most rate movements: inflation, measured through the Consumer Price Index (CPI), and the broader health of the economy. When inflation runs above the target band, the RBA tends to lift the cash rate to cool demand; when growth and employment soften, it has room to cut. The Board sets monetary policy independently of the government of the day, which is designed to keep short-term politics out of these decisions.

What this means for your borrowing

When the cash rate moves, lenders respond on their own terms. A cut is not always passed through in full to borrowers, while increases tend to flow through to advertised rates more quickly. This is a policy difference, not a quirk — each lender's funding mix and margin decisions are their own, which is why two banks can react to the same RBA decision quite differently.

For a borrower, the practical work is structural rather than predictive. You are not trying to forecast the next move; you are trying to build a loan that holds up across a range of them — sensible buffers, a structure that can be refinanced cleanly if the market shifts, and a clear view of how a rate rise would land on your repayments. Rate cycles are a feature of property lending, not an emergency to be timed.

If you want to understand how the current rate environment affects what you can borrow and how your loan should be structured around it, book a strategy session and we will map it out against your circumstances.

General information only — not personal financial product or credit advice. Lending is subject to each lender's policy, your full circumstances and responsible-lending assessment. AeFin is an Australian Credit Representative (CR 464548) of Finsure (ACL 384704).