The impact of the RBA's interest rate cut on Australians explained

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Australian homeowners breathed a sigh of relief on Tuesday when the Reserve Bank of Australia (RBA) announced its first rate cut since 2020.

The cash rate has dropped 0.25 per cent from 4.35 per cent to 4.1 per cent, with Australia’s ‘big four’ banks CBA, Westpac, NAB and ANZ all set to pass on the rate cut.

While this will give some relief to mortgage holders, it will also impact those with other types of loans, as well as interest rates on savings accounts.

How will rate cuts impact savings accounts?

The RBA’s rate decisions often impact the interest rates banks apply to savings accounts.

In the wake of the announcement, Westpac will pass the rate cut onto its main savings accounts, the E-Saver and Life accounts. Its subsidiaries, including St George and Bank of Melbourne, are also reducing interest on savings accounts.

Commonwealth Bank is passing on the full cut to its Goal Saver account, and 0.2 per cent to its Netbank Saver account.

Sally Tindall, data insights director at financial comparison site Canstar, said those with savings accounts who have benefited from rate rises will now experience a reduction in earnings from interest.

“Any cash rate change is a double-edged sword because there are winners and there are losers in these changes,” she said.

“So when the cash rate was on the rise, variable rate borrowers were feeling the weight of the 13 RBA rate hikes because they were passed on in full by the banks to their existing customer base. However, savers finally started seeing decent returns on their nest eggs.”

While most banks were quick to announce rate cuts on variable home loans, most have not yet announced whether changes will apply to savings accounts.

Tindall said she expects most will reduce savings interest rates.

“Banks don’t typically rush out the door with bad news, and we’re expecting bad news for savings rates,” she said.

Will term deposits be impacted by rate cuts?

Tindall said while term deposits and fixed-rate mortgages are connected to RBA decisions, they both less likely to be immediately impacted by rate cuts as are their rates are set in stone.

She said banks often reduce these rates ahead of RBA announcements, with over 20 banks cutting term deposit rates in early February ahead of the cash rate reduction.

“What banks do is they look at a huge range of factors; they look at the cost of buying money on the wholesale market to help fund their home loans versus getting it from things like households via term deposit,” she said.

“They look at competition between the lenders, they look at appetite amongst consumers for these type of products, and they also look at what variable mortgage rates might do in that fixed rate term.”

Are personal loans and car loans impacted by interest rate cuts?

The interest rate on personal loans can be impacted by RBA decisions, but it depends on the type of loan, and whether it is fixed or variable.

“Personal loans including car loans can be based on a variable rate, and we could potentially see these rates go down on the back of an RBA cut,” Tindall said.

“If you’ve got a personal loan on a variable rate or a car loan on a variable rate, it’s a fantastic idea to pick up the phone to your lender and see if they’re going to be passing on this cut to you.”

Since rate hikes started in April 2022, Tindall said personal loans on variable rates have increased by 3.39 percentage points on average.

Credit card interest rates are not impacted by RBA decisions.

How else will rate cuts impact Australians?

Tindall said mortgage holders with a $500,000 loan will see a reduction of $77 in their minimum monthly repayments.

She said while some will put this into savings or extra mortgage repayments, the rate cut could also stimulate the economy and lead to people spending more on goods and services.

“There are some people that will use that money straight away to repair holes in their budgets that have been piling up in the background for months, and there will be other people that will now be able to get around the supermarket without breaking into a financial sweat.”

But Tindall warned there could still be tough times ahead if household spending increases and inflation rises again.

“We are not out of the woods yet,” she said.

“That’s why the RBA has said, don’t expect a procession of rate cuts in quick succession, because the and household budgets and then have inflation pop back up again.”