At the start of each month, you are going to hear and see a lot about the Reserve Bank of Australia (RBA) and its official cash rate (OCR). But what does the OCR actually do? You know it has something to do with inflation, and the economy, and most importantly the interest rate on your home loan.
So what about how it actually works?
Well, that is ancient Greek to a lot of people. But fear not! We have some guiding pointers about this all-important feature.
Is it the same as interest rates?
Not quite! The cash rate, in broad terms, is the rate at which banks and lenders can borrow money that they in turn give out to people who take out personal loans, home loans and so on. It acts as a guiding hand for interest rates, but does not strictly dictate them.
According to a 2012 ABC interview with Saul Eslake, economist at Merrill Lynch, there has been less room for risk in what banks borrow since the Global Financial Crisis. This has drawn interest rates closer to the cash rate. Consequently, when the cash rate is as low as it currently is, it means interest rates come down to very low levels.
What else does the cash rate do?
It also keeps inflation in line. The OCR can foster economic growth by encouraging spending, and it can keep inflation under control. The RBA wants to keep the latter within 2 and 3 per cent generally, and adjusts the cash rate when it needs to change the rate of inflation.
Overall, the OCR is a big driver of some important factors for our economy – including interest rates. It can be a complicated thing to get a grip on, but hopefully we have given you some useful detail on what it can do. To find out more about interest rates in particular, make sure to contact us sooner rather than later.