Your guide to why the recent interest rate cut matters

For a while there, Aussie homeowners braced themselves every time the Reserve Bank of Australia (RBA) made an announcement. Since early 2022, nearly every update brought with it another interest rate hike - and another hit to the hip pocket.

But the tide is finally turning.

At the beginning of this year, we saw the first glimmer of relief as the cash rate dipped from a year-long freeze at 4.35% down to 4.1%. Now, in the latest move, the RBA has lowered it again to 3.6% - the third drop this year. 

If you’ve got a mortgage, you’re probably breathing a sigh of relief. Or, if you’re looking to buy your first home, you might be wondering what this all means. Let’s break it down.

What is the Reserve Bank of Australia?

The RBA has been around since 1960 and acts as Australia’s central bank. It operates independently of the government, with the main mission of keeping the economy stable and healthy.

A big part of that role involves keeping inflation in check. Ideally, inflation rises gradually - around 2–3% per year - alongside wage growth. The RBA also monitors the strength of the Aussie dollar and, of course, sets the cash rate. The cash rate influences all other interest rates, including mortgage and deposit rates.

What are interest rates, anyway?

Interest rates directly affect how much it costs banks and lenders to borrow money.

When the RBA raises the cash rate, borrowing becomes more expensive for banks, and they typically pass that cost on to customers by increasing interest on loans and mortgages. When the RBA lowers the cash rate, it’s cheaper for banks to borrow, and those savings can be passed on to consumers through lower loan interest rates.

So while you don’t borrow directly from the RBA, changes to the cash rate ripple through the system and influence how much interest you pay - or save - on everything from your home loan to your credit card.