What is the Difference Between Cash Rate and Interest Rate?

The cash rate and interest rates are related but distinct concepts in the financial world. Here are the key differences between them:

• Cash Rate: The cash rate, also known as the overnight cash rate, bank rate, or base interest rate, is the interest rate commercial banks charge one another for overnight loans. It is set by the Reserve Bank of Australia (RBA) and serves as a benchmark for banks to base their products' interest rates.
• Interest Rate: Interest rates are the rates borrowers pay to lenders for loans, such as mortgage interest rates on home loans. These rates are determined by the lender based on several factors, including the cash rate, the lender's costs of funding, and other market conditions.

While the cash rate does not directly determine interest rates, banks and lenders pay close attention to it when setting their interest rates, and they often respond to changes made by the RBA. For example, when the cash rate is high, it is likely that the interest rates on loans will also be high, and vice versa. However, mortgage interest rates are not directly impacted by changes to the cash rate and may be influenced by other factors as well.

In summary, the cash rate is the interest rate banks pay on overnight loans between themselves, while interest rates are the rates borrowers pay on loans from lenders. The cash rate can influence interest rates, but they are not directly determined by it.

Comparative Table: Cash Rate vs Interest Rate

The cash rate and interest rates are different but closely related concepts in the financial world. Here is a table outlining the key differences between the two:

In summary, the cash rate is set by the central bank and serves as a benchmark for financial institutions to set their own interest rates for loans and deposits. Interest rates, on the other hand, directly impact the economy and are influenced by the cash rate, market conditions, and other external factors.