What is the RBA’s inflation target?

The Reserve Bank aims to keep inflation between 2% and 3% a year, around the middle of that range, over time.

How often does the RBA change the cash rate?

Its board meets eight times a year to decide. When it moves the rate, it’s usually by 0.25 percentage points, and banks often pass the change on to variable home loans within a few weeks.

How much does a rate rise add to my repayments?

On a $600,000 home loan over 30 years at 6.2%, a 0.25% rise adds about $98 a month, and a 1% rise about $398. Cuts lower repayments by similar amounts.

Should I fix my home loan rate?

Fixing gives you certain repayments for a few years, but you miss out if rates fall, and leaving early can mean break costs. Fixed loans also often limit extra repayments and may not have an offset account.

Inflation and interest rates in Australia, explained

Q: What is a real return?

What your money earns after inflation. Savings paying 4.5% when inflation is 3% grow by about 1.5% a year in real terms, before tax on the interest.

What is inflation?

Inflation is the rise in the prices of everyday things over time. The Australian Bureau of Statistics measures it with the Consumer Price Index (CPI), the cost of a typical basket of goods and services.

If prices rise faster than your pay or your savings, you’re getting poorer without noticing.

Try it: what inflation does to your moneyMove the sliders to change the inflation rate and the number of years.

Inflation a year3%

Years10

$100 kept as cash would buy

$74

of today’s shopping

Something costing $100 today

$134

in 10 years

At 3% a year, prices double about every 23 years.

Why the RBA changes the cash rate

The Reserve Bank sets the cash rate, which banks’ other rates follow. Its board meets eight times a year to decide.

When inflation is too high, it raises the cash rate. Borrowing costs more, people spend less, and price rises slow.
When the economy is weak, it cuts the rate to encourage borrowing and spending.

Banks set their own rates, so they don’t always pass on the full change, or do it straight away.

What it means for you

What you have	When the cash rate rises
Savings account	Usually pays more, though banks don’t always pass it all on
Variable-rate home loan	Repayments go up, usually within weeks
Fixed-rate home loan	No change until the fixed period ends
Credit card	Usually little change: rates are already high
New loan	Costs more to take out

Monthly repayments on a $600,000 home loan Illustrative: a variable rate of 6.2% over 30 years

Rates up 0.25%, to 6.45% $98 more: Now (6.2%): $3,675 After the rise: $3,773
Rates up 0.5%, to 6.7% $197 more: Now (6.2%): $3,675 After the rise: $3,872
Rates up 1%, to 7.2% $398 more: Now (6.2%): $3,675 After the rise: $4,073

Each 0.25% rise adds about $98 a month

Assumes the bank passes on the whole rise and the loan has its full term left. Cuts work the same way in reverse.

When a fixed period ends, loans usually roll onto a variable rate, often higher than what new customers get. Ask your bank for a better rate or refinance.

If rates are cut and your bank lowers your repayments, keeping them at the old amount pays the loan off faster. The extra repayment calculator shows how much sooner.

Beating inflation

What matters is your real return: what your money earns after inflation. Savings paying 4.5% when inflation is 3% grow by about 1.5% a year in real terms, before tax on the interest.

Keep your emergency fund in a high-interest account or offset account.
For goals more than five years away, investing, including your super, has historically beaten inflation by more. See investing basics.
HELP debts are indexed to inflation or wages, whichever is lower, rather than charged interest: see HECS-HELP repayments explained.