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Speaker 1: Just before we get into this podcast, you might hear

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Speaker 1: some background noise. Unfortunately, our neighbors decided it was the

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Speaker 1: perfect time to throw a party. But we hope it

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Speaker 1: doesn't disturb you too much. Now let's get to the

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Speaker 1: episode already.

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Speaker 2: And this is this is the Daily Off.

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Speaker 1: This is the Daily OS. Oh, now it makes sense.

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Speaker 1: Good morning, and welcome to the Daily OS. It's Wednesday,

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Speaker 1: the nineteenth of February. I'm Billy, I'm Sam. Yesterday afternoon

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Speaker 1: the Reserve Bank of Australia announced it is lowering the

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Speaker 1: cash rate for the first time since twenty twenty. The

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Speaker 1: cash rate was four point three five percent, but it

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Speaker 1: is now four point one percent. It's big news for Ossie's,

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Speaker 1: particularly those with a mortgage or who are wanting to

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Speaker 1: apply for a home loan for the first time. And

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Speaker 1: it's also big news for the Labor government with this

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Speaker 1: likely now impacting when we will go to an election.

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Speaker 1: If you're confused about any of that, you have come

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Speaker 1: to the right place. We're here to discuss what a

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Speaker 1: cash rate actually is and how it will affect you,

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Speaker 1: whether you have a mortgage or not.

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Speaker 3: To be totally honest with you, I feel like the

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Speaker 3: once a month announcement by the RBA on whether the

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Speaker 3: cash rate goes up or down or stays the same

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Speaker 3: is the moment where a lot of people go, I

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Speaker 3: feel like I should know why this is so important

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Speaker 3: and everyone's talking about it, but I still don't know. Yes,

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Speaker 3: and so no matter how long this takes, we're going

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Speaker 3: to go through the mechanics behind this and why you

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Speaker 3: should care, because cash rate is something that has come

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Speaker 3: up in recent years, probably more than ever.

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Speaker 1: Just quickly, Sam, I have to pull you up. You

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Speaker 1: said it's once a month. It's actually not anymore. It's

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Speaker 1: less frequent than that. There's about ten a year now.

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Speaker 3: Okay, Well, if that doesn't give you a sense that

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Speaker 3: I live and breathe news and I didn't actually know that,

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Speaker 3: then I think everyone can relax listening to this knowing

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Speaker 3: it's okay not to know a heap about this.

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Speaker 1: Absolutely.

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Speaker 2: Let's start with the cash rate. What is it?

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Speaker 1: Great place to start. So, the cash rate is the

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Speaker 1: rate of interest that the Reserve Bank of Australia charges

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Speaker 1: banks for short term loans.

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Speaker 3: Okay, and we're pretending we didn't get taught this in school.

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Speaker 3: What is the RBA? What is the Reserve Bank.

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Speaker 1: So the Reserve Bank of Australia also known as the RBA,

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Speaker 1: is Australia's central bank, and so they're not a bank

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Speaker 1: that is accessible to the public. They're more a bank

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Speaker 1: for the government and also for commercial banks. But it's

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Speaker 1: not like you or I could go to the RBA

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Speaker 1: and ask for a loan. Absolutely not. It's just for

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Speaker 1: the government and commercial banks, and their main aim is

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Speaker 1: to ensure that the economy is stable and that the

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Speaker 1: price of things don't rise too quickly, and so to

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Speaker 1: do that, their key responsibility is to set the cash rate,

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Speaker 1: which is what we're talking about today. And like I said,

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Speaker 1: this is the interest rate that the RBA charges commercial

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Speaker 1: banks to borrow money. This almost always flows through to

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Speaker 1: other interest rates the economy, which is why it's often

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Speaker 1: used interchangeably with interest rates. So this means that the

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Speaker 1: cash rate if passed on fully by the banks to

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Speaker 1: the public, so the banks that you or I would

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Speaker 1: use sam the cash rate will impact the rate of

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Speaker 1: interest on loans, including mortgages, and it will also impact

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Speaker 1: the interest on savings, which is not something that we

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Speaker 1: often talk about when it comes to the cash rate,

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Speaker 1: and the higher the interest rate, the more expensive it

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Speaker 1: is to borrow money, but also the more interest you

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Speaker 1: receive on savings.

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Speaker 3: So the IBA sat down this week. It was actually

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Speaker 3: a two day meeting that concluded with this announcement. How

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Speaker 3: do they actually make their decision on what to do

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Speaker 3: with the cash rate?

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Speaker 1: So they mostly base their decision on something called underlying inflation. Now,

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Speaker 1: when we talk about inflation, we usually are either referring

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Speaker 1: to headline inflation or underlying inflation.

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Speaker 2: So let's go through headline first. Okay.

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Speaker 1: Headline inflation measures how much goods and services have increased

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Speaker 1: over a period of time, usually over twelve months, so

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Speaker 1: that's the one that we most commonly hear about in

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Speaker 1: the news. But then there's underlying inflation, which is what

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Speaker 1: the RBA focuses on, and it's similar. It measures the

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Speaker 1: rate of price growth, but it removes extremes on either side.

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Speaker 1: So for example, if there's a sudden fall in energy prices,

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Speaker 1: or even if there's a sudden increase in the price

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Speaker 1: of apples, it doesn't include that. It's just looking for

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Speaker 1: how the middle seventy percent of things are.

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Speaker 3: Moving, okay, and so they take all of that data,

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Speaker 3: they crunch it up, they work out how the economy

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Speaker 3: is performing, and they set the cash rate, which is

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Speaker 3: the objective with that is to make it move either

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Speaker 3: up or down or stay the same. How does that

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Speaker 3: actually impact inflation? Though?

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Speaker 1: So, the cash rate, as we have seen in the

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Speaker 1: past few years, means that people with mortgages have less money.

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Speaker 1: And as I were saying before, higher interest rates make

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Speaker 1: it more expensive for you to borrow, and that is

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Speaker 1: what the RBA wants in this case.

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Speaker 2: Why do they want that.

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Speaker 1: Because if you can borrow less money, then you can

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Speaker 1: buy less stuff and that means that there is less

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Speaker 1: pressure on demands for goods and services, and that should

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Speaker 1: stop prices from going further up. It really is a

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Speaker 1: balancing act.

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Speaker 3: Are you following those I am, and I always actually

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Speaker 3: like to think about coffee with this, and so if

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Speaker 3: I'm understanding correctly, what you're saying is if the RBA

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Speaker 3: puts the cash rate up, then people in a neighborhood

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Speaker 3: aren't going to have as much money to go and

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Speaker 3: buy coffee. And so when the coffee shop tries to

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Speaker 3: put prices up from five dollars to five dollars fifty

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Speaker 3: people aren't actually buying the coffee because it's too expensive, exactly, and.

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Speaker 2: So they keep it at five dollars.

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Speaker 3: Prices don't move up as quickly, and the RBA has

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Speaker 3: achieved what they want.

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Speaker 1: That is a perfect explanation, probably a little bit idealistic

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Speaker 1: for how the economy actually works, but you get the idea. Yeah,

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Speaker 1: and that's why the cash rate is used as a

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Speaker 1: tool to fight high inflation and to bring inflation down

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Speaker 1: when it is too high, which is exactly what the

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Speaker 1: RBA has done. One other point here, to keep going

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Speaker 1: with your coffee analogy, is that when inflation goes down,

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Speaker 1: that doesn't mean that prices are going backwards. So this

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Speaker 1: isn't about your five dollar coffee going down to four

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Speaker 1: dollars fifty. It's just about it not going to the

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Speaker 1: five dollars ten, or to even the five dollars fifty

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Speaker 1: as fast as the last fifty cents increase.

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Speaker 3: Okay, So we're not going back to the glory days

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Speaker 3: of three dollar coffees. We're kind of here now. But

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Speaker 3: it's about the speed at which we move to the

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Speaker 3: next price point.

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Speaker 1: Yes, and just a quick tangent. I always think about this, like,

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Speaker 1: one day, are we going to be paying fifteen dollars

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Speaker 1: for a coffee. But that's just how the economy works.

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Speaker 1: Anyway that will send you in di is a whole

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Speaker 1: nother podcast.

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Speaker 3: We're going to leave that to one side. There is

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Speaker 3: so much in this Billy. Can we just stick to

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Speaker 3: what you're talking about with underlying inflation?

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Speaker 1: Yes, I just wanted to give you an insight to

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Speaker 1: my three am thoughts.

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Speaker 3: Fantastic three am thoughts. I also have memories of older

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Speaker 3: members of my family talking about going to the movies

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Speaker 3: for one shilling and all of that kind of stuff.

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Speaker 3: All right, too much economics talk is going to hurt

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Speaker 3: everybody's brain. What's the RBA's aim for that underlying inflation bracket?

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Speaker 1: Okay, So the RBA wants the rate of underlying inflation

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Speaker 1: to be between two to three percent, So that means

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Speaker 1: that it wants the average price of goods and services

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Speaker 1: in Australia to increase no more than three percent over

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Speaker 1: a twelve month period.

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Speaker 2: Okay.

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Speaker 3: And what is the rate of underlying inflation right now?

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Speaker 1: So it's three point two percent.

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Speaker 2: So that is just outside that target.

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Speaker 1: Range of two to three percent.

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Speaker 3: But it has been coming down for a while though, right.

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Speaker 1: Exactly, So underlying inflation actually peaked at six point eight

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Speaker 1: percent in December twenty twenty two, right at the tail

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Speaker 1: end of the COVID pandemic, and it's been on a

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Speaker 1: downward trajectory since then, so now it's less than half

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Speaker 1: of that. And it was that year twenty twenty two

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Speaker 1: that inflation really started to increase at a concerning rate.

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Speaker 1: And it was also twenty twenty two that the cash

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Speaker 1: rate also started to increase.

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Speaker 3: So talk to me about that, and talk to me

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Speaker 3: about the cash rate since twenty twenty two, because it

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Speaker 3: was zero point one percent, wasn't it.

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Speaker 1: Yeah, it was at zero point one percent. That was

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Speaker 1: during the pandemic. So they first introduced that cash rate

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Speaker 1: in about November twenty twenty and that was a record low.

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Speaker 1: It had never been that low before, so that was massive.

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Speaker 1: And the whole idea at the time was to prevent

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Speaker 1: the economy from collapsing because of the sudden arrival of

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Speaker 1: the pandemic, which obviously no one was expecting, and the

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Speaker 1: RBA wanted people to be able to borrow money easily

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Speaker 1: and spend that money to avoid a recession. Another one

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Speaker 1: of those jargoni words. We won't get into that, but

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Speaker 1: basically they wanted people to spend spend money exactly. So

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Speaker 1: it was at that rate of point one percent from

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Speaker 1: November twenty twenty to May twenty twenty two when it

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Speaker 1: started to increase, and it was on a consistent increase

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Speaker 1: until it reached four point three five percent in November

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Speaker 1: twenty twenty three, where it has remained at that level

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Speaker 1: ever since.

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Speaker 3: So it hasn't moved since November of twenty twenty three.

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Speaker 1: No, it has stayed at that level. And to give

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Speaker 1: you some context about the last twenty five years and

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Speaker 1: where the rate has been, that rate of four point

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Speaker 1: three five percent was the highest it has been since

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Speaker 1: November twenty eleven. So this was obviously big news when

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Speaker 1: it reached that level of four point three five percent

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Speaker 1: in twenty twenty three, and it has been a huge

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Speaker 1: topic of conversation since. And I hope I don't have

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Speaker 1: to say any other years because it's a lother calendar

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Speaker 1: and tumbling over all of the years, but I hope

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Speaker 1: that you're broadly following me.

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Speaker 3: So it gets set at four point three five percent

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Speaker 3: at the end of twenty twenty three. We've sat there since.

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Speaker 3: We're now in February of twenty twenty five, and there

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Speaker 3: was a cut.

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Speaker 1: There was a cut. It went down to four point

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Speaker 1: one percent, and that was the first time it has

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Speaker 1: gone down since twenty twenty The reasoning for the cut,

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Speaker 1: the RBA Board said in a statement reading here, in

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Speaker 1: the December quarter, underlying inflation was three point two percent,

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Speaker 1: which suggests inflationary pressures are easing a little more quickly

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Speaker 1: than expected. These factors give the Board more confidence that

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Speaker 1: inflation is moving sustainably towards the midpoint of the two

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Speaker 1: to three percent target range. So hopefully now you kind

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Speaker 1: of have all of the context to understand that quote,

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Speaker 1: and you'll notice a lot of the coverage from news

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Speaker 1: outlets focus on what this means for mortgage holders. And

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Speaker 1: just to give you an idea of what it does

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Speaker 1: mean in real terms, someone with a mortgage of about

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Speaker 1: six hundred thousand dollars will be paying about one hundred

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Speaker 1: dollars less in their monthly repayments.

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Speaker 3: And we know a lot of our audience doesn't have mortgages.

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Speaker 3: We know a lot of our audience, young Australians in particular,

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Speaker 3: are renting. Some might not even be in the housing

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Speaker 3: market at all. They might still be at home with

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Speaker 3: mum and dad. What about for those without a mortgage,

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Speaker 3: how is this going to impact them?

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Speaker 1: So for savers, this cut to the cash rate is

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Speaker 1: actually less positive. So if you have savings in a

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Speaker 1: bank at the moment, you'll notice at the end of

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Speaker 1: every month you will get an interest payment. Now, because

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Speaker 1: of this cut, likely there will be less interests that

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Speaker 1: you are earning on that money.

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Speaker 3: One other thing I want to talk about before we

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Speaker 3: leave it there right at the top, you talked about

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Speaker 3: the impacts that this could have on the federal election,

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Speaker 3: which we know is going to be before the middle

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Speaker 3: of May. Talk to me about the political implications of

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Speaker 3: all of this.

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Speaker 1: Yeah, So, as we have now mentioned many times on

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Speaker 1: this podcast in many deep dives, Australia needs to have

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Speaker 1: an election by the seventeenth of May. We still don't

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Speaker 1: know when exactly that will be, and that decision is

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Speaker 1: up to Prime Minister Anthony Albanesi. What we do know

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Speaker 1: is that cost of living will likely be one of,

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Speaker 1: if not the most, important topic that voters are voting

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Speaker 1: on this election, and this cash rate cut is largely

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Speaker 1: seen as a positive thing for the government. We'll at

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Speaker 1: least seen as a positive thing by the Labor government,

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Speaker 1: so they will likely argue in the days and months

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Speaker 1: to come, that they have used their policies, their economic

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Speaker 1: policies to drive down inflation so much so that our

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Speaker 1: central bank is slightly taking its foot off the gas now.

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Speaker 1: But on the other hand we have Opposition leader Peter Dudden,

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Speaker 1: who we expect will make the argument that it has

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Speaker 1: been under the Albanesi government that rates have risen so

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Speaker 1: quickly and that inflation has been so high, and it's

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Speaker 1: likely that Dudden will say that a single rate cut

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Speaker 1: won't relieve the cost of living pressures felt by Australians

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Speaker 1: over the past few years.

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Speaker 3: It's a really interesting one, that last point, because it's

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Speaker 3: worth mentioning the RBA is not politically influenced. Yeah, it's

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Speaker 3: an independent institution, completely independent from whichever government is in

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Speaker 3: power of the day, and that doesn't change the fact

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Speaker 3: I guess that both sides of politics, for as far

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Speaker 3: back as we can remember, have used RBA decisions for

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Speaker 3: their political gain or to perhaps score some points off

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Speaker 3: the other side. But it's worth mentioned that the IBA

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Speaker 3: sits outside.

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Speaker 1: Of government, completely independent.

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Speaker 3: No matter which party is in power, and I think

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Speaker 3: that's probably enough jargon.

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Speaker 1: Yeah, thank you so much for coming to my economic

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Speaker 1: sissons sound.

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Speaker 2: I think that was very good. But that was very good.

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Speaker 3: It's a really tough topic and thank you all for

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Speaker 3: sticking with us through that. It's a really important part

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Speaker 3: of our economy. Hopefully we gave you a bit of

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Speaker 3: a rundown of how it all works and why the

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Speaker 3: decision by the IBA yesterday was so significant. If you

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Speaker 3: enjoyed this podcast and you're listening on Apple or Spotify,

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Speaker 3: we would love for you to give us a rating

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Speaker 3: or the press follow. It really helps us in signaling

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Speaker 3: to these apps that you like what you're hearing and

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Speaker 3: you want other people to listen in and enjoy. We'll

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Speaker 3: be back this afternoon with some headlines. Until then, have

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Speaker 3: a good day.

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Speaker 2: My name is Lily Maddon and I'm a proud Arunda

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Speaker 2: Bunjelung Calcuttin woman from Gadigl Country.

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Speaker 1: The Daily oz acknowledges that this podcast is recorded on

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Speaker 1: the lands of the Gatighl people and pays respect to

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Speaker 1: all Aboriginal and torrest Rate island and nations. We pay

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Speaker 1: our respects to the first peoples of these countries, both

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Speaker 1: past and present,