21 Sep 2021

What Happens When the Cash Rate Increases?

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Australian interest rates increase and decrease when the Reserve Bank of Australia makes changes to the cash rate. If the RBA announces that they increased the target, it goes into effect the following day. When the cash rate increases, it increases the cost of borrowing.

The RBA determines economic policy. An economic policy helps stabilise the economy under all circumstances. The economy is a sum of several intertwined factors. When the RBA increases the cash rate, the economy is overheating. To cool it down, borrowing becomes more expensive. It impacts all loans, including the business loan.

An increase in the cash rate impacts the banks and individuals who hold debt. On the other end, it encourages individuals to start saving. 

The cash rate is the interest rate on unsecured overnight debt transactions banks engage in with each other. If the bank’s rates increase, the banks increase their rates for consumers. Moreover, it directly impacts individuals who hold variable rate loans. 

In several cases, lenders forewarn their clients that a rate increase is on the horizon. However, in severe cases, the rate increases go into effect almost immediately.

Therefore, a consumer must exercise fiscal responsibility. Some individuals leverage debt in their favour. They’re in a position to take a risk. The same is not true for all consumers holding debt.

Cash Rate Increases Conclusion

After the cash rate increases, consumers have some time to lock in lower rates. Timing plays an important role. To understand how changes in the cash target impact your current loan products, contact our Mortgage House loan specialists. 

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