Business Environment Profiles - Australia
Published: 17 March 2025
Cash rate
4 Percentage
0.7 %
This report analyses the Australian cash rate target. The cash rate is the interest rate that authorised deposit-taking institutions pay or charge for overnight funds. The cash rate target is controlled by the Reserve Bank of Australia (RBA) and is the main monetary policy tool of the RBA in signalling their stance and decision of easing or tightening policy. The RBA board meets on the first Tuesday of every month and decides whether to change the cash rate and by how much. Changes to the cash rate tend to be made in 25 basis point increments. The main objectives for the bank when adjusting the rate are to keep inflation within the target of 2-3%, maintain full employment and ensure the economic prosperity and welfare of Australians. The data for this report is sourced from the RBA and is presented as the average cash rate over each financial year.
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IBISWorld forecasts the cash rate to dip by 0.08 percentage points in 2024-25, to average 4.18%. In response to rising concerns over inflation, the RBA increased the cash rate multiple times since May 2022. However, the elevated cash rate environment also emphasises the need for the central bank to balance the effect of rate hikes on the broader economy while simultaneously trying to tame inflationary pressures. Data from the Australian Bureau Statistics (ABS) revealed an annual trimmed mean underlying inflation of 3.2% in the December 2024 quarter, lower than the central bank's expectations. Wage pressures eased and GDP growth in the September 2024 quarter was also lower than the RBA's expectations. Government spending has been the key driver for GDP growth and employment activity for the past few quarters as the high interest rate environment limits private demand. These factors have prompted the RBA to slash the cash rate target to 4.1% in the February 2025 Monetary Policy Decision, signalling the central bank's shift towards a loosening monetary policy to stimulate the economy. While the labour market remains tight, concerns over slowing economic activity, asset prices and laggard consumer demand are expected to continue influencing monetary decisions by the RBA over the remainder of the year.
At the start of the past five-year period, growth in the Australian economy was weak, dipping by 0.3% in 2019-20 due to the implementation of border and state-wide lockdowns. This has prompted the RBA to conduct expansionary fiscal and monetary policies, which include cutting the cash rate and handing out government stimulus like JobKeeper Payment. The RBA slashed the cash rate twice in March 2020 as the central bank held an emergency meeting in the middle of the month because of the onset of the COVID-19 pandemic. With the economy falling into its first recession in nearly 30 years, the RBA decided to further lower the cash rate by 15 basis points to a historic low of 0.10% in November 2020 to support economic recovery. The RBA also implemented further measures, including yield curve control, a Term Funding Facility (TFF), reducing interest rates on its exchange settlement accounts to zero and purchasing longer-term bonds. These measures led to lower borrowing costs and elevated asset prices.
At the beginning of the past five years, Australia's economic growth was weak, declining by 0.3% in 2019-20 due to border closures and state-wide lockdowns. This prompted the Reserve Bank of Australia (RBA) to implement expansionary fiscal and monetary policies, including cutting the cash rate and introducing government stimuli like the JobKeeper Payment. In March 2020, amid the onset of the COVID-19 pandemic, the RBA held an emergency meeting and slashed the cash rate twice. Facing its first recession in nearly 30 years, the RBA further reduced the cash rate by 15 basis points to a historic low of 0.10% in November 2020 to support economic recovery. Additional measures included yield curve control, a Term Funding Facility, reducing interest rates on exchange settlement accounts to zero and purchasing longer-term bonds, leading to lower borrowing costs and elevated asset prices. Following this period, the RBA has implemented a more contractionary policy - as the economy opened back up in 2023 and 2024 - to combat rising inflation whilst balancing the cash rate climb with employment figures, wage growth and consumer spending.
The cash rate remained at 0.10% until May 2022. These expansionary policies have limited further deterioration in economic conditions and contributed to the rapid economic recovery during the period. Nonetheless, the expansionary policy has also introduced other challenges. As pandemic-related lockdowns began to ease, pent-up demand and the resurgence of the tourism sector have driven prices upwards. The surge in demand and persistent supply chain disruptions, driven by events like the Russia-Ukraine conflict, have led to unbalanced demand-supply conditions, lifting the general cost of living - with many goods and services seeing higher prices. The demand-supply imbalance has propelled many households' cost of living, prompting the RBA to hike the cash rate from May 2022 through to the latest hike in November 2023. Similar global conditions led several other countries, including the United States and New Zealand, to increase interest rates. These factors are why IBISWorld forecasts the cash rate to rise at an average annual rate of 0.70 percentage points over the five years through 2024-25.
IBISWorld forecasts the cash rate to fall by 0.74 percentage points over the next year, averaging...
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