How you should respond when the RBA leaves the cash rate on hold.
The Reserve Bank of Australia (RBA) is responsible for managing the country’s monetary policy. With an aim to maintain price stability, low levels of unemployment and consumer confidence, the RBA is responsible for setting the interest rate on overnight loans to commercial banks.
This rate is known as the official cash rate and it affects other interest rates across the financial sector, influencing the actions of lenders and borrowers and impacting on the health of the economy as a whole.
How does the RBA come to a 'no change' decision?
With the exception of January, the RBA board meets on the first Tuesday of every month to discuss monetary policy and to set the official cash rate. The board examines factors such as financial markets, economic conditions in Australia and around the world, and the considerations for monetary policy.
After assessing each of these important areas, the board will then decide what the cash rate target should be in order to satisfy its monetary policy goals. So on the first Tuesday afternoon of the month, the RBA’s governor announces whether the official cash rate will rise, fall or remain the same.
If you hear news that the cash rate is on hold, this means that the RBA board has decided to leave the rate unchanged. There are many reasons why the RBA can decide to leave the rate at its current level, such as if the economy is performing at a suitable level and inflation is within target, or if the RBA is waiting for the effects of previous rate changes to filter through the economy as a whole.
For example, when the decision was made to leave the rate unchanged in March 2015, the board was influenced by factors such as slower than expected growth, an undervalued currency and a high unemployment rate.
Preparing for a rate change
Just because the cash rate may have remained unchanged recently, it doesn’t mean you should expect it to stay in the same place in the future. Here at finder.com.au, every month we ask our resident rate experts to predict what the RBA’s next decision on the cash rate will be. Staying up to date with these expert forecasts can ensure that you are fully prepared for when the rate does rise or fall in future.
There are also several steps you can take to minimise the impact a rate change has on your personal finances, including:
- Making extra home loan repayments. If your loan allows you to make extra repayments ahead of time, doing so is a great idea. Not only will this reduce the amount of debt you have, but it’ll also minimise the outstanding balance on which you have to pay interest, should interest rates rise.
- Pay off your credit card debt. When rates look set to rise, working to pay off as much of your credit card balance as possible is also a good move. With less owing on your card, there’s a smaller amount on which you’ll have to pay interest.
- Consider refinancing and debt consolidation. If you’re worried that a predicted change in the cash rate could have a negative effect on your financial situation, now is a good time to assess your options. If you think you’ll struggle to continue to make home loan repayments, perhaps you need to look into refinancing. If you have multiple repayments you need to manage for several different debts, looking at consolidating all your debt into one loan and one regular repayment could save you a whole lot of money and stress.
- Lock in a rate. If you need a home loan and you think now is the best time to find a great rate, consider taking out a fixed rate loan and locking in an attractive interest rate for a set period. The same applies with savings accounts - if you think interest rates will drop and your savings balance will suffer as a result, consider locking away some of your funds in a term deposit to take advantage of higher interest rates while you can.
- Find a home loan with an offset account. Home loans with offset accounts allow you to reduce the amount of interest you pay. This can help protect you when the RBA raises the official cash rate.