Australian cash rate

The Australian cash rate is the Reserve Bank of Australia’s operational target for monetary policy and the key overnight interest-rate benchmark in the Australian dollar money market. It refers to the rate on unsecured overnight loans between banks, and the RBA sets a cash rate target to influence broader financial conditions, inflation and employment.^[1]

Overview

The cash rate is central to Australia’s monetary policy framework. The Reserve Bank of Australia (RBA) describes monetary policy as involving the setting of the interest rate on overnight loans in the money market, with that rate influencing other interest rates in the economy, the behaviour of borrowers and lenders, economic activity and ultimately inflation.^[2]

In everyday usage, the term “cash rate” is often used to refer to the “cash rate target”, the policy rate announced after meetings of the RBA’s Monetary Policy Board. More precisely, the cash rate is the market rate at which overnight unsecured funds are transacted between banks in the domestic interbank market, while the cash rate target is the level set by the central bank as the operational expression of monetary policy.^[1]

The RBA identifies the Interbank Overnight Cash Rate as the Monetary Policy Board’s operational target for monetary policy. It is calculated as a volume-weighted average of interest rates on eligible overnight unsecured transactions in the domestic interbank cash market.^[1] The benchmark is also known in financial markets as AONIA, the Australian Overnight Index Average.^[1]

As of the RBA decision announced on 29 September 2026, the cash rate target was increased by 25 basis points to 4.60 per cent, effective 30 September 2026.^[3] Because the target can change at each policy meeting, historical or current references to the cash rate should specify the date.

Institutional setting

The cash rate sits within Australia’s central-bank framework. The RBA is responsible for formulating and implementing monetary policy in Australia. Following the 2024 amendments to the Reserve Bank Act 1959, the RBA states that its overarching objective is to promote the economic prosperity and welfare of the people of Australia, now and into the future.^[4]

For monetary policy, the RBA says this objective is pursued through policy settings that, in the Board’s opinion, best contribute to price stability in Australia and the maintenance of full employment in Australia.^[4] These objectives are reflected in Australia’s flexible inflation-targeting framework, under which the RBA and the Australian Government have agreed that price stability is best pursued by maintaining consumer price inflation between 2 and 3 per cent over time.^[4]

The cash rate target is set by the RBA’s Monetary Policy Board. The decision is announced in a media release at 2:30 pm Sydney time after each Board meeting, and any change in the cash rate target generally takes effect on the following day.^[4] The Board’s monetary policy decisions are made independently of the government of the day, although the framework itself is set out in legislation and in the Statement on the Conduct of Monetary Policy agreed between the Treasurer and the RBA.^[4]

The cash rate should not be confused with the RBA as an institution, with the Reserve Bank Board, or with the Australian dollar as a currency. It is an interest-rate benchmark and policy target used by the central bank to transmit monetary policy through the financial system.

Measurement and publication

The RBA is the administrator of the cash rate benchmark. It calculates the cash rate from transaction data sourced directly from the Reserve Bank Information and Transfer System (RITS), Australia’s high-value settlement system. The RBA introduced this transaction-based methodology in May 2016, replacing an earlier survey-based approach.^[1]

Eligible cash market transactions are overnight unsecured loans between banks that settle across their own Exchange Settlement Accounts (ESAs) at the RBA. The RBA’s methodology excludes, among other categories, transactions concluded outside RITS, transactions involving non-bank institutions, intragroup transactions, and transactions whose terms are part of broader agreements.^[1]

The calculation is a volume-weighted average of interest rates at which eligible cash market transactions were settled. The result is rounded to two decimal places.^[1] RBA staff review transaction data and refer apparent mismatches or anomalies to the transacting banks for clarification.^[1]

The RBA publishes the calculated cash rate and the Cash Rate Total Return Index on each day that RITS is open for interbank settlement. The published cash rate is made available to market data services before 9:20 am AEST or AEDT on the relevant publication date.^[1]

The Cash Rate Total Return Index is a related benchmark measuring the performance of an investment earning the cash rate with interest reinvested. It is used by market participants and analysts as a near risk-free return benchmark in Australian dollars.^[1]

Implementation in money markets

The RBA implements the cash rate target through its operations in domestic money markets. The key operational setting is the supply of Exchange Settlement balances, which are funds held by banks and other eligible institutions in accounts at the RBA and used to settle payments among themselves and with the central bank.^[5]

The cash rate is determined in the market by the interaction of supply and demand for these balances. To keep the cash rate close to the target set by the Board, the RBA adjusts system liquidity so that the available quantity of Exchange Settlement balances is consistent with demand.^[5]

Open market operations are the traditional mechanism through which the RBA manages liquidity. By lending cash against eligible securities or withdrawing cash from the system, the RBA can influence the availability of overnight funds and keep money-market conditions aligned with the target. The RBA also uses standing facilities and remuneration on Exchange Settlement balances as part of the operating framework.^[6]

The RBA explains that the cash rate trades inside a corridor, with the Bank able to transact in Australian money markets to affect supply and demand for cash and steer the cash rate close to target.^[7] The corridor structure helps limit the extent to which the market rate can move away from the policy target in normal conditions.

The RBA’s implementation framework has evolved over time. During periods of very low interest rates or market stress, the RBA has used tools beyond the cash rate target, including forward guidance, government bond purchases, a yield target and low-cost term funding for banks.^[8] These tools were used during the COVID-19 period when the cash rate was close to its effective lower bound, but the cash rate target remained the central reference point for monetary policy.

Transmission to households, businesses and markets

Changes in the cash rate target affect the economy through monetary-policy transmission channels. The RBA states that monetary policy influences interest rates faced by households and businesses, including housing loan rates, business lending rates and deposit rates.^[8] Those rates influence borrowing, saving, consumption and investment decisions, which in turn affect aggregate demand, employment and inflation.^[8]

For households, a higher cash rate target generally raises variable mortgage rates and other lending rates, although the timing and size of pass-through depend on banks’ funding costs, competition and loan terms. Higher deposit rates can increase income for savers while increasing debt-servicing costs for borrowers. For businesses, cash-rate changes affect working-capital costs, investment hurdle rates and the relative attractiveness of holding cash versus undertaking new projects.

For financial markets, the cash rate is a base reference rate for Australian dollar yield curves. It is used as the reference rate for Australian dollar overnight indexed swaps and for the ASX 30 Day Interbank Cash Rate Futures contract.^[1] Expectations about future RBA policy decisions are therefore reflected in money-market rates, bond yields and derivatives prices.

The cash rate also interacts with the exchange rate. All else equal, higher Australian interest rates relative to other countries can make Australian dollar assets more attractive to international investors, although exchange-rate outcomes also depend on commodity prices, global risk appetite, fiscal conditions and expectations for other central banks such as the Federal Reserve System.

Cash rate target versus observed cash rate

The distinction between the target and the observed rate is important. The target is the policy rate announced by the Monetary Policy Board. The observed cash rate is the benchmark calculated from actual eligible overnight transactions in the interbank market.^[1]

In normal market conditions, the observed cash rate tends to remain close to the target because banks have incentives to lend or borrow overnight funds at rates linked to the RBA’s corridor and liquidity-management operations. If the system has abundant liquidity, the observed rate may be influenced by the rate paid on Exchange Settlement balances. If liquidity is scarcer, the observed rate may be more directly shaped by banks’ demand for overnight funds and the RBA’s open market operations.

A day’s published cash rate may therefore be best understood as a market benchmark produced under RBA methodology, while the cash rate target is the central bank’s desired level for that benchmark.

Relationship with inflation targeting

Australia’s inflation-targeting framework gives the cash rate its policy purpose. The RBA states that its 2–3 per cent inflation target is designed to maintain low and stable inflation while supporting full employment and sustainable economic growth.^[4]

When inflation is expected to be above target and demand is judged to be too strong relative to supply, the Board may raise the cash rate target to tighten financial conditions. Higher interest rates tend to reduce demand over time by making borrowing more expensive and increasing incentives to save. When inflation is below target or economic activity is weak, the Board may lower the target to support demand, employment and inflation.

The framework is flexible rather than mechanical. The RBA does not set the cash rate solely in response to the latest inflation reading. It considers forecasts, labour-market conditions, wages, productivity, global developments, financial stability and the balance of risks. This forward-looking approach reflects the fact that monetary policy affects the economy with lags.

History and development

The modern cash-rate framework developed alongside Australia’s transition to a more market-based monetary-policy regime. Since the early 1990s, the RBA has used an inflation target as the practical expression of its monetary-policy objectives.^[4] Over recent decades, the cash rate has been the principal conventional instrument used to pursue that target.^[4]

The operational framework has changed as Australia’s payments and money markets have evolved. Real-time gross settlement, the development of Exchange Settlement Accounts, and changes in interbank liquidity management shaped the way the RBA steers the overnight rate. In 2016, the RBA moved from a survey-based cash-rate calculation to a transaction-based method using RITS data, strengthening the benchmark’s basis in actual market activity.^[1]

During the COVID-19 pandemic, the cash rate reached very low levels and the RBA deployed additional monetary-policy tools. These included a target for the yield on an Australian Government bond, government bond purchases, forward guidance and term funding for banks.^[8] The RBA later discontinued the yield target on 2 November 2021.^[6] These measures illustrate that while the cash rate is the primary policy tool in normal conditions, the RBA can use additional tools when circumstances require.

Uses in financial products and analysis

The cash rate is widely used in financial analysis because it is close to the risk-free overnight rate in Australian dollars. It provides a reference point for valuing short-term money-market instruments, floating-rate products, overnight indexed swaps and expectations for future central-bank policy.^[1]

Banks, investors and economists use the cash rate target to interpret the stance of monetary policy. A rising cash rate target is generally described as a tightening of monetary policy; a falling target is generally described as an easing. However, the overall stance of policy also depends on inflation expectations, real interest rates, credit conditions and the level of rates relative to neutral estimates.

The cash rate is relevant to deposit accounts and variable-rate loans, but it is not the same as the interest rate paid by households or businesses. Retail and commercial rates incorporate bank funding costs, credit risk, operating costs, competition, capital requirements and product features. As a result, banks may pass through cash-rate changes in full, in part, with a lag, or differently across products.

Comparison with related Australian benchmarks

The cash rate differs from other Australian interest-rate benchmarks. Bank bill swap rates (BBSW), for example, are term money-market benchmarks linked to bank bills and negotiable certificates of deposit, rather than overnight unsecured interbank loans. Government bond yields are market rates on Commonwealth securities and reflect expectations for future policy, inflation, risk premia and supply-demand conditions.

The cash rate is also distinct from returns on equity-market benchmarks such as the S&P/ASX 200 Index and from exchange-traded securities listed on the Australian Securities Exchange. It is a short-term interest-rate benchmark and monetary-policy operating target, not an equity index, bond, fund or deposit product.

Governance and benchmark role

Because the cash rate is a benchmark used in financial contracts and market pricing, its governance and methodology are important. The RBA publishes a procedures manual and methodology explaining data inputs, calculation, publication, use of expert judgment, error handling, complaints processes, conflicts of interest and procedures for material methodology changes.^[1]

The benchmark’s reliance on RITS transaction data gives it a direct connection to the underlying overnight interbank market. Nevertheless, the volume of eligible transactions can vary, and benchmark administration requires rules for data quality and exceptional cases. The RBA’s administrator role makes the cash rate both a monetary-policy target and a financial-market benchmark.

Significance

The Australian cash rate is one of the most important prices in the Australian financial system. It anchors the short end of the Australian dollar yield curve, informs household and business borrowing costs, and provides the operational lever through which the RBA pursues price stability and full employment. Its importance arises not from the size of the overnight cash market alone, but from the way the target rate shapes expectations and pricing across the broader economy.