Interest rates: What it means for you

TODAY the Reserve Bank decides on whether to move the official interest rate. News.com.au explores how you're affected by the central bank's monthly decision.

TODAY the Reserve Bank cut official interest rates to 3 per cent, a level not seen since March 1960. News.com.au explores how you're affected by the central bank's monthly decision.

What does it mean for me?

The Reserve Bank controls the cash rate, which is the basic cost of money. Banks borrow money from the RBA at that rate, then turn around and lend that money, charging a higher interest rate to make a profit.

The RBA uses cash rate changes to control the supply of money in the economic system, cutting rates to make money cheaper and easier to borrow, which then flows through the banking system to homeowners, businesses and other borrowers.

Since the cash rate is the cost to banks of borrowing money from the RBA, when that rate falls, banks may decide to pass on those savings to their customers with lower mortgage rates, or cuts to credit card rates.

Banks can pass on all, none or some of the RBA cuts to homeowners with variable mortgages. Last month, the RBA left rates steady at 3.25 basis points.

Between September and February, the Reserve Bank cut the cash rate by 400 points.

Banks have passed on about 360 of those basis points, but like to warn customers they can’t afford to pass on cuts because the global financial crisis makes it so expensive for them to get money from overseas.

Savings rates

Unfortunately for the frugal, banks are often quick to cut interest rates on savings accounts and term deposits after an RBA cut.

Money parked in savings accounts and term deposits earn between 3-5 per cent, compared to up to 8 per cent back in October.

The dollar

People who buy and sell currencies for a living follow interest rate changes obsessively, as a sign of confidence in a country’s economy.

The dollar has risen in recent months to hover around $US0.71. Currency traders view the Aussie as a high-risk currency, and get nervous when the RBA cuts rates, and the dollar falls.