Before getting into the role of the Reserve Bank of Australia (RBA), it helps to start with the basics.

What are interest rates?

Interest rates shape two everyday things: what it costs to borrow money, like mortgages, car loans and credit cards; and what you earn on savings.

At their simplest, interest rates are the price of money over time - or as economists often put it, the 'rental fee' for money.

  • If you borrow money, you’re paying to use someone else’s cash now and repay it later
  • If you save money, you’re letting someone else use your cash — and they pay you for that.

What the RBA does is influence where interest rates sit at a given point in time.

How the Reserve Bank influences interest rates

In Australia, interest rates are guided by decisions made by the Reserve Bank of Australia. When it moves rates, the effects tend to flow through to households and businesses over time — including people who don’t have a mortgage.

The interest rate the Reserve Bank controls

The main rate the RBA sets is called the cash rate target.

CommBank economist Harry Ottley describes it as “basically the interest rate that the RBA sets which anchors other interest rates across the economy”.

More specifically, it’s the rate that influences how much banks pay to borrow and lend money in short-term overnight markets. But the important part isn’t the mechanics — it’s what happens next.

As Ottley explains, “when the RBA puts up interest rates, the banks generally follow”.

That’s how a change set by the RBA works its way through to home loans, savings accounts and business lending.

Why the Reserve Bank changes interest rates

Most interest rate decisions come back to inflation, or how quickly prices are rising across the economy.

Ottley explains inflation as a situation where “there’s too much money chasing too few goods”. When demand is strong and supply can’t keep up, businesses tend to raise prices.

The RBA aims to keep inflation within a target range of 2-3% over time. If inflation is running above that range, higher interest rates can help slow spending and investment. If inflation is below the target and the economy is growing slowly, lower rates can help encourage activity.

As Ottley puts it, “the idea of it is to slow the economy down” when inflation is too high. When rates fall, “it means that there’s more money in people’s pockets to spend” and that helps fuel more spending.

How interest rates flow through to everyday life

If you have a mortgage or want one

If you’re on a variable-rate mortgage, interest rate changes can affect your repayments. Higher rates usually mean higher repayments, which can leave less room in the household budget.

Interest rates also affect borrowing capacity. When rates are higher, banks assess loans assuming higher repayments, which can limit how much people can borrow.

Over time, higher rates can also slow housing demand, which can reduce how quickly home prices grow.

If you’re renting

Interest rates don’t usually affect renters in a direct, one-for-one way.

As Ottley explains, renters aren’t exposed to the same 'cash flow' impact as mortgage holders, because they’re not making loan repayments that change with interest rates.

Rent levels are driven more by supply and demand in the rental market — how many homes are available and how many people are looking for one.

That said, interest rates still matter. Higher rates can slow house price growth, influence investor decisions and affect how quickly new housing is built.

There’s also a savings angle. When interest rates are higher, savings accounts and term deposits often offer better returns. For renters trying to build a deposit, that can make saving easier over time.

If you’re saving

Interest rates play a clearer role here. When rates are higher, many savings products pay more interest. When rates are lower, returns tend to fall.

What matters most is how those returns compare with inflation, because inflation affects what your savings can actually buy.

Why inflation doesn’t always match how it feels

Inflation in Australia is measured using the consumer price index (CPI). It tracks price changes across a basket of goods and services that households spend money on, with more weight given to things people spend more on, like food and rent.

One important detail Ottley points out is that CPI “doesn’t include mortgage costs, for example”. So when interest rates rise and mortgage repayments increase, that pressure doesn’t show up directly in the inflation number.

The RBA also looks at measures designed to smooth out short-term price movements, such as sales periods or temporary rebates. Ottley says this helps show “the underlying pulse of inflation rather than all of the movements”.

It is also important to remember that inflation is the rate of change of prices, not the level. That’s why inflation can be easing in the data while everyday costs still feel high. Prices aren’t falling — they’re just rising more slowly than before.

The takeaway

Interest rates are one of the main tools the RBA uses to manage inflation and guide the economy.

When rates move, they tend to affect:

  • how much borrowers repay
  • how much savers earn
  • how quickly housing prices and other assets grow
  • how willing households and businesses are to spend or invest

Understanding how interest rates work makes it easier to see how those decisions connect back to everyday life.