For the fourth time this year, the Reserve Bank of Australia (RBA) has lifted the cash rate by 0.25 of a percentage point in a bid to bring inflation under control.
asserted
Bank → lift → control
While the RBA's decisions are most felt through mortgage repayments, their impact extends well beyond home loans.
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impact → feel → loans
Here's a breakdown of how the latest increase will affect households differently, depending on whether Australians are paying off a mortgage, renting, or relying on savings.
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Australians → affect → savings
To first understand how the cash rate impacts different parts of our hip pocket, let's take a step back.
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's → understand → step
The cash rate, set by the RBA, is Australia's official interest rate charged on unsecured overnight loans between banks.
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rate → set → banks
In simple terms, it's how much it costs banks to borrow from each other.
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it → cost → other
The RBA's decision to increase the official cash rate makes it more expensive for lenders to borrow money.
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lenders → increase → money
That means banks will almost certainly charge customers a higher interest rate to still make a profit because they are paying more to borrow the money in the first place.
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they → mean → place
On Tuesday, the RBA increased the cash rate to 4.6 per cent in an attempt to slow down inflation in the economy.
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RBA → increase → economy
Commonwealth Bank head of Australian economics Belinda Allen says the central bank has lost its patience, given inflation has sat above the target band for most of the past six years.
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inflation → say → years
"Higher interest rates make borrowing more expensive and saving more attractive," Ms Allen says.
"That tends to slow household spending and business investment, reducing some of the demand pressures in the economy and, over time, helping bring inflation back towards the RBA's 2–3 per cent target.
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That → make → target
"
How the cash rate increase could affect you
Rate rises are felt fastest, and most sharply, by Australians with variable-rate mortgages because banks typically pass on RBA increases in full.
AMP chief economist Shane Oliver says the cash rate is the main tool steering borrowing costs and households should expect lenders to adjust quickly.
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lenders → affect → costs
"As we've seen with the first three hikes this year, the banks will likely announce a 0.25 per cent increase in their mortgage rates on the same day," Dr Oliver says.
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Oliver → see → day
Ms Allen says households with a mortgage may lower spending or use savings to keep spending as a result of higher interest rates.
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households → say → rates
"This cash flow channel is one way monetary policy works to impact demand in the economy," she says.
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she → work → economy
Each 0.25 per cent rise in the cash rate adds roughly $91 per month to repayments on a $600,000 variable-rate loan with 25 years remaining.
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years → add → loan
The four 2026 increases totalling 0.75 per cent have added approximately $360 per month for borrowers on a $600,000 loan.
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increases → total → loan
That equates to around $4,320 extra per year.
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That → equate → year
Here's how much a September rate hike will cost borrowers, as well as the total monthly increase if rates go up for a fifth time in either November or December:
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rates → cost → November
Source: Canstar
It is not just existing mortgage borrowers hit by the rate rises though.
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It → exist → rises
For prospective buyers, Canstar estimates that the borrowing capacity of someone on an average full-time wage of $108,650 would be reduced by more than $47,000, while a couple both on average wages would see a reduction of nearly $95,000.
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couple → estimate → 95,000
If you are on a fixed-rate home loan, you won't see any changes.
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you → fix → changes
Those rates are locked in.
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rates → lock → ?
But when the fixed term expires and rolls to a variable rate, the full impact of any rate cycle will apply at once.
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impact → fix → cycle
Some landlords may try to offset the impact of rate rises on their cash flow by raising rents over time, although there are constraints on how often and how much rent can be increased each year in most states.
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rent → try → states
The RBA has also dismissed the idea that landlords pass their increased borrowing costs on to renters.
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landlords → dismiss → renters
Speaking on 9Now's The Pay Off podcast, RBA chief economist Sarah Hunter said what was really driving rents came down to supply and demand.
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driving → speak → supply
"If you're an individual landlord, you own one property in one rental market, you might want to put the rent up when your interest rate goes up if you've got a mortgage," Dr Hunter said.
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Hunter → own → mortgage
"But you're competing with all the other properties that are available … and so, it's demand and supply; it's the local market that will equilibrate rent.
"
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that → compete → rent
If rents are tracking up, it's usually because demand growth is stronger than supply growth."
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growth → track → growth
Ms Allen and Dr Oliver agree with this logic.
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Allen → agree → logic
Cotality's quarterly rental review found rents rose by 1.6 per cent nationally in the June quarter, driven by a severe lack of available stock across the country.
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rents → find → country
The national dwelling vacancy rate sat at 1.6 per cent, unchanged from March and remaining below the five-year average of 1.8 per cent.
"The main factor driving rents is the shortage of rental property," Dr Oliver says.
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Oliver → sit → property
Savings accounts and term deposit interest rates usually rise after an RBA hike, making it more attractive to park your money.
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it → rise → money
This is because, while the cash rate also affects borrowing costs for banks, it also sets the rate of return for their own deposits.
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it → affect → deposits
Cash rate hikes improve their returns, which may be passed on to consumers through higher savings interest rates.
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which → improve → rates
Dr Oliver says while short-term deposit rates largely move in line with the cash rate, longer-term term deposit rates are also shaped by government bond yields and other borrowing costs.
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rates → say → yields
With today's RBA increase and bond yields already rising, he says savers are likely to benefit from higher returns.
"
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savers → rise → returns
The odds are, yes, we will see deposit rates continue to rise."
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rates → see → ?
Higher interest rates tend to strengthen the Australian dollar (AUD).
And that's because it's more attractive for foreign investors to park their money in Australian interest-bearing assets (like savings accounts, term deposits, and government bonds) because they can get a higher rate of interest here.
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they → tend → interest
…and 17 more, not listed.
The Aporia
