3 Practical effects of the official cash rate

Banking and lending terms can be very dry. Interest rates, loan-to-value ratios, mortgage repayment schedules – it can be a tough subject to take a deep interest in for the average consumer. Most of the time, these things translate to simple actions or obligations, like how much you can borrow and how much you have to pay back.

Usually, the more intricate details of the world of economics aren’t something that our customers here at Bank of Heritage Isle need to worry about: we deal with that for you. But there is one particular subject that everyone should be aware of and understand the significance of: the official cash rate (OCR).

But we don’t want to bore you to death by diving into an economic lecture, so here are three practical effects that the official cash rate (and any changes to it) have on your money.

1) Interest rates for your home loan

Everyone wants to pay a better interest rate, and this is one thing that the OCR affects. The lower it is, the better deals we can offer to those looking for home loans, personal loans, any kind of lending. When it drops, you’ll often find that interest rates drop too, and vice versa.

There are other things that affect your interest rates (such as your credit history), but the OCR can be a large factor.

2) The power of the Australian dollar

The Reserve Bank of Australia wants to keep inflation between 2 and 3 per cent annually, and has generally been successful. But when the OCR goes down, it encourages spending, which can increase inflation and create one-sided exchange rates, making your money overseas not go quite as far as it did before.

Inflation this year so far, according to the Australian Bureau of Statistics, is at 1.7 per cent, meaning the Aussie dollar is stronger, but another cut could be coming to bring this back in line with desired targets.

3) The effectiveness of your savings account

It isn’t just loan interest rates that are affected by the cash rate – it’s savings accounts too. Term deposits in particular specifically include any potential fluctuations in the cash rate in your interest rate. Due to the way the cash rate works, the higher it is, the more likely the banks are going to want to incentivise larger deposits, so savings interest rates rise.

The economy can affect the cash rate as much as vice versa, but the most important takeaway to have is that the OCR can impact nearly every aspect of your finances. Which is why it’s best to keep yourself informed and have the right financial planning experts on your side.