min read
· Posted on
February 21, 2024

Debt free? The RBA's cash rate still affects your life. Here's how.

Hey you without the mortgage. Did you know the RBA's monthly cash rate announcement still affects you?!

What's the key learning?

  • The RBA's cash rate affects everyone (even if you don't have a mortgage)
  • Cash rate rises often mean an increase in the savings rate too

Two things we're hearing on repeat - Unholy by Sam Smith, and the RBA increasing the cash rate...again.

The RBA just announced its sixth consecutive hike in the cash rate of 0.25 basis points or 0.25%. Since April, the official cash rate has risen from 0.1% to now 2.85%.

Cash rate rising - the big picture

Pulse check - WTF is RBA again?

The RBA or Reserve Bank of Australia is a central bank - it’s the bank that the government and NAB, ANZ, Commbank etc. borrow from. Its job is to maintain economic stability in Australia by using a range of different policies. The main way it does this is by setting the cash rate. Finance bros call this monetary policy, finance hoes call this getting the bag as a national collective.

Put simply, the cash rate is the interest rate that the government and banks pay to the RBA for borrowing moula. The RBA sets the cash rate on the first Tuesday of every month (except January) and like Miley Cyrus, it’s been on ‘the climb’.

The main reason we’re seeing this hike? To cool down inflation. Jump into our refresher article on inflation here.

COVID-19 recovery, Russia Ukraine war, supply chain bottlenecks due to lockdowns in China are some of the major factors that have been pumping up inflation, and therefore cost of living.

Cash rate rising - you, living your life debt-free, the small picture

By pushing up the cash rate, the RBA wants to make borrowing more expensive to slow spending and make saving more attractive. 

When banks pay higher interest rates, so do we, meaning more than 6 million mortgage holders in Australia are facing higher monthly repayments on their home loans. 

And Aussies planning to take out a mortgage are having second thoughts, choosing instead to sit tight and save.

For some context, RBA is gunning for a target inflation rate of 2-3%... and at last glance, the inflation was sitting at 7.3%... so we’re a hell of a lot higher than the target. 

Until we get closer to this target inflation rate, we’ll be seeing the cash rate go up each month, and pressures on spending go up alongside it. 

If you don’t have a mortgage (and not planning on taking out one soon), you may even consider these cash rate rises as a positive. That’s because every additional rise means we’re (hopefully) one step closer to lower inflation.

Debt or no debt, it’s important to be prepared for what that means. Sudden expenses or changes to personal finances can be much harder to recover from in tight economic conditions. 

But hey - there are also some pretty good-looking savings rates out there - even up to 4% per annum. So this may just be the perfect time to start squirreling away!

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