The Reserve Bank of Australia (RBA) is the central financial institution of the country and is responsible for maintaining economic stability. Its primary role is to set the monetary policy of the country and issue the currency needed to maintain adequate cash flow levels.
The RBA is a government body and is owned by the Commonwealth of Australia. It has a governing board with 9 members appointed by the treasurer. The institution keeps its eyes on local and international markets, ensures the currency is relatively stable and monitors both the economic prosperity of the country and the welfare of its citizens.
What is RBA cash rate?
The cash rate is the value of the money trading in the local market and is one of the most important influences on the country’s economy and financial transactions. This is the rate at which the RBA offers overnight loans to commercial banks and allows them to carry out day-to-day transactions. This rate influences everything from the interest rates on loans to inflation. Changes in the cash rate influence:
- The value of Australian dollar
- Australia’s Gross Domestic Product
- Level of consumer confidence
The RBA board decides the cash rate every month in a meeting and any changes in the rate usually has an immediate impact on the local economy.
RBA cash rate decision
The RBA decides whether it should maintain the same cash rate, lower it or increase it each month. This decision is made based on several local and international market factors as well as the RBA’s goals and plans. The board considers a number of factors including:
International economic conditions – The RBA will consider the condition of the international market, including the values of US, Chinese, UK and Japanese currencies. They will also consider consumer demands and supply in the global market along with the condition of the international housing market, in their cash rate decision.
Domestic economic conditions – Domestic conditions are the primary influence on the cash rate set by the RBA. The organisation takes several factors into consideration, including:
- Employment rates – The employment rates can influence the RBA’s decision because higher unemployment rates can encourage them to cut the cash rates. Lower cash rates can encourage business investment and that in turn will improve employment rates.
- Inflation – The RBA always attempts to maintain the inflation rates at around 2% to 3% and has successfully managed this over the years. During high inflation, the RBA will increase the cash rate in order to curb consumer demand and balance it out once again.
- Business and consumer confidence – Low consumer confidence leads to lower investment, which can slow the economy down by a considerable margin. The RBA will lower the cash rate in the hopes of restoring consumer confidence and stimulating the economy once again.
- Housing debt – Lower interest rates can create a very favourable market, especially in capital city areas. This can eventually lead to a real estate bubble which is not good for the domestic economy. The RBA will increase the cash rate to control the housing debt and ensure the market remains healthy.
- The currency – It’s important to maintain a good balance in the value of the currency. If the value is too low, exporters will suffer and if the value is too high, importers will suffer. The RBA will control the cash rate to control the currency value and ensure there is some form of balance in the economy.
The condition of the financial markets – The RBA keeps a keen eye on the performance of financial institutions like banks and lending agencies. They keep tabs on their lending and deposit accounts, as these two accounts are the biggest influences on the interest rates and economy. They are also two of the first factors affected by any rate changes.
Their decisions in the past – The RBA keeps a record of their past decisions and will look at how they arrived at the current cash rate before they make their decision.
Once the RBA has considered all of these factors, they will discuss these carefully until they arrive at a consensus and determine the best cash rate for the month.
RBA cash rate history
Financial experts and RBA board members look at the historical movement of the cash rate and determine what the future movement will be like. Here’s a brief glimpse at the changes in cash rate values over the past few years.
- The current cash rate at May 2017 is 1.5
- The rate around May 2016 was 1.75
- The rate around May 2015 was 2
- In May 2014, the rate was 2.5
- In May 2013, the rate was 2.75
- In May 2012, the rate was 3.75
- In May 2011, the rate was 4.75
- In May 2008, the rate was 7.25
As you can see, there is a downward trend in cash rates since 2008. There was a sharp drop in the rates around May 2009 when the rate dropped from 7.25 to 3 over the course of a single year.
RBA cash rate forecasts
After studying the current market, economy, consumer demand and international markets, many experts believe that there will be no change in the cash rate. In fact, the RBA rate indicator forecast states that 95% agree that there will be no change, while 5% agree that the rate will be slashed to 1.25. There is no indication that the central bank will increase the cash rate at this time.
The current RBA cash rate is at a record low of 1.5%, which is a steep drop from the high 17.5% in 1990. When you look at the RBA cash rate graph, you will notice that the rate has been consistently low over the past few years.
This will only change if the market requires a significant change and stimulus from the RBA. For now, most experts agree that the cash rate doesn’t need to be altered to move the economy.