Often when you hear about The Reserve Bank of Australia (RBA) then you hear these words as well “cash rate”. If you do not understand what this means then you are not alone. Research has shown that many Australian’s do not know what the cash rate is. I will try explain below to help you out so next time you understand what the news presenters are talking about.
What the cash rate is
The RBA describes the cash rate as “the interest rate on overnight loans in the money market”. This means the interest that banks must be to the RBA for overnight loans.
In other words, it is the amount of interest a commercial bank must pay the Reserve Bank if it takes out an overnight loan.
Why are banks borrowing money overnight?
Every transaction, every day impacts the banks overall positions. If they do not have enough to cover their transactions for the day then they borrow from the RBA overnight. They can also borrow from other banks.
I hope this helps your understanding of the cash rate. The unfortunate thing is banks are not legally obliged to pass on the rate cuts to mortgages.