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Behind every headline about inflation or mortgage stress sits the Reserve Bank of Australia (RBA), which is essentially the nation’s economic timekeeper.
Understanding what drives its decisions helps explain far more than finance; it reveals how Australia’s economy really ticks.
We spoke with Deakin University finance expert Dr Omar Bashar to delve further into how the RBA works and what the RBA actually does.
The Reserve Bank of Australia is Australia’s main bank. It’s responsible for contributing to the stability of currency, employment, and economic prosperity and welfare of the Australian people.
It does this by setting interest rates, which influence how expensive or affordable it is to borrow money. Interest rates also affect things like home loans, business investment and spending.
The RBA monitors risks in the financial system to prevent major problems, issues Australia’s money, and ensures payment systems between banks and businesses run smoothly.
It also manages Australia’s foreign currency reserves to help stabilise the value of the Australian dollar.
In other words, the RBA works behind the scenes to keep prices steady, people employed, and the economy functioning well.
The RBA meets eight times per year to review interest rates and therefore decide the impact on our pockets.
The schedule is announced on the RBA’s website well before the start of any given year.
In 2025, the RBA announced its first rate cut on 18 February, followed by another 0.25% cut on 20 May and a 0.25% cut on 12 August. They met again on 5 November, holding the cash rate at 3.60%, and kept it unchanged at their final 2025 meeting on 9 December.
The first meeting for 2026 will be held on 2 February.
The term ‘interest’ in a financial sense generally sends a shudder down the spine.
Higher interest rates make borrowing more expensive, while lower rates make it cheaper, meaning people are more likely to spend money when rates are low.
So, what does the RBA actually do to increase these rates?
‘The RBA raises interest rates by lifting the cash rate target. Once the RBA announces a higher cash rate, banks’ borrowing costs go up.’
This quickly influences how other banks set their own rates.
‘This is because the RBA will start to sell government bonds at the higher rate, and no other financial institution will be willing to lend to a bank at a lower rate than the new cash rate,’ he says.
Now that we’ve unpacked what the RBA does to increase interest rates, let’s look at how the RBA cuts interest rates.
‘The RBA cuts interest rates by reducing the cash rate target. Once the RBA announces a lower cash rate, banks’ own borrowing costs go down. This is because the RBA will start to buy government bonds at the lower rate, and no other financial institution will be willing to borrow from a bank at a higher rate than the new cash rate,’ Dr Bashar explains.
A cut to the cash rate doesn’t just stay with the RBA; as everyday Australians we begin to notice it ourselves.
‘Banks are then able to pass this on by reducing the interest rates they charge on home loans, business loans, and credit cards. The interest rates on savings accounts usually go down as well,’ he says.
The cash rate is at the heart of Australia’s economy, it’s the RBA’s key tool for helping control inflation and keeping economic conditions in balance.
To keep inflation from rising too high, the RBA may increase the cash rate.
‘If the underlying inflation goes above 3%, the RBA may decide to increase the rate,’ Dr Bashar says.
Raising the cash rate makes borrowing more expensive, which slows spending and helps bring inflation back down.
Conversely, the RBA may cut the cash rate when underlying inflation is low (usually below 2%) and the economy shows signs of slowing, such as weak growth or higher unemployment. Lowering the rate makes borrowing cheaper and encourages spending and investment.
The RBA states it has a flexible inflation target, with an aim of keeping consumer price inflation between two and three percent – a range it believes supports economic growth without putting too much pressure on everyday Australians.
From determining interest rates to keeping inflation in check, the Reserve Bank of Australia plays a central role in maintaining the nation’s financial balance. Its decisions impact every part of the economy, influencing how much we spend, borrow and save.
By understanding what the RBA does, we gain a clearer picture of the forces shaping Australia’s economic future and the everyday choices that affect us all.
