How are interest rates determined in Australia?

If there’s one term that sends shivers down the spines of home owners across Australia, it’s interest rates. 

Interest rates have recently been cut in Australia. What does this mean? How are interest rates determined?  

Deakin University’s Senior Lecturer in Economics, Dr Omar Bashar answers all things interest rates and provides an insight into how interest rates are determined in Australia. 

What is the current interest rate in Australia? 

The current interest rate in Australia is 4.10%, down from 4.35%. This cut came into effect on February 18 2025, and was the first cut since February 2020.  

‘Initially, it will not have much impact on the economy other than a slight relief to the borrowers and some short-lived boost to the share prices,’ says Dr Bashar. 

When did interest rates start going up in Australia? 

Interest rates started increasing in Australia in May 2022. However, they have been on hold since November 2023, before they were recently cut to 4.10%.  

The RBA determines interest rate cuts in Australia based on things like inflation as well as global factors such as international trade, currency exchange, global events and more. 

In 2022 interest rates increased due to the impact of COVID-19 on the Australian economy. 

Who determines interest rates in Australia? 

In Australia, interest rates are determined by the Reserve Bank of Australia (RBA). Interest rates are employed to ensure price growth remains stable which is also known as inflation.  

The RBA uses a monetary policy to do this. This policy involves increasing the cost of money to slow down the economy or lowering the cost of money to encourage spending,  which can in turn promote economic growth. 

‘The RBA decides on the cash rate target, which ultimately determines the level of interest rates on all deposit and lending rates in the banking system. To determine the cash rate, the RBA mainly examines the core inflation data.  

The goal is to keep the inflation rate between 2 and 3 percent. The central bank also considers developments in the labour market and the growth rate,’ Dr Bashar explains. 

In Australia, if the inflation rate is low and, in addition, the economy is slowing down (think higher unemployment, lower GDP growth rate), then the RBA would most likely determine an interest rate cut is necessary. 

How does interest rates affect cost of living? 

Cost of living pressures are felt by all of us. How much of an impact will a decrease in interest rates have on cost-of-living? Dr Bashar says while it will have an impact, don’t expect to see any major price cuts in the supermarket. 

In great news for renters, the interest rate cut will likely reduce rent, thanks to the easing pressure on mortgage holders. 

‘If the interest rate is cut, it will reduce the cost-of-living pressure for mortgage holders. Investors in the property market usually pass on the high borrowing cost burden to the renters by increasing rents. The falling interest rate would thus help the renters as well,’ says Dr Bashar. 

How often do interest rates change in Australia? 

Dr Bashar says interest rate changes are at the discretion of the RBA, however with a target rate in mind. 

‘Because the inflation rate has kept falling for the last few quarters, and if this trend continues, the core inflation rate will return to the RBA’s target range of 2-3% in a few months.’ 

He also says there is unlikely to be another rise in 2025. 

‘Recent data shows the inflation rate is trending downwards and the economy is slowing down. So, there is no possibility of any interest rate rise this year.’ 

In the long run, interest rate changes are highly dependent on what is happening around the rest of the world, therefore the RBA can determine interest rates in Australia and it can even come without expectation. 

‘However, we can never be certain 100%, as there is always a chance of new shocks hitting the global economy that may very quickly change the macroeconomic environment in Australia,’ he admits. 

Interest rates may send shivers down your spine, however they are the pulse of the economy. They either fuel growth or send markets into a tailspin.