Every six weeks or so, a group of nine people sit around a table in Martin Place, Sydney, and make a decision that ripples through the entire Australian economy. The Reserve Bank of Australia’s board sets the official cash rate — and that single number has an outsized influence on the value of the Australian dollar.

But how does the process actually work? And why should anyone who cares about currency markets pay attention?

What Is the Cash Rate?

The cash rate is the interest rate that banks pay to borrow money from each other overnight. It sounds obscure, but it functions as the anchor for virtually every other interest rate in the economy. When the RBA moves the cash rate up, mortgage rates, business loan rates, and savings rates all tend to follow. When it goes down, so do they.

The RBA uses this tool to manage inflation and support employment — its two core mandates under the Reserve Bank Act. If inflation is running too hot, the board raises rates to cool spending. If the economy is weakening and unemployment is rising, it cuts rates to encourage borrowing and investment.

How the Board Makes Its Decision

The RBA board meets eight times a year (down from eleven, following the 2023 review). In the lead-up to each meeting, RBA staff prepare extensive briefing materials covering inflation data, employment figures, household spending, business conditions, global economic trends, and financial market developments.

The board itself includes the Governor (currently Michele Bullock), the Deputy Governor, the Treasury Secretary, and six external members appointed by the Treasurer. These external members come from diverse backgrounds — business, academia, and public policy.

The discussion at each meeting is not a simple vote on “up, down, or hold.” The board considers a range of scenarios and weighs the risks of acting too early against the risks of acting too late. Minutes released two weeks after each meeting give a window into the debate, though they are carefully worded to avoid spooking markets.

Why Currency Traders Care

Interest rates are one of the most important drivers of currency values. The mechanism is straightforward: higher interest rates tend to attract foreign capital, because investors can earn a better return on deposits and bonds denominated in that currency. This increased demand pushes the currency higher.

Conversely, when a central bank cuts rates, the currency typically weakens as capital flows toward higher-yielding alternatives.

For the Australian dollar, the key comparison is usually with the US Federal Reserve. If the RBA and the Fed are both cutting rates at roughly the same pace, the AUD/USD exchange rate may not move much. But if one central bank moves ahead of the other, the divergence can drive significant currency swings.

This is exactly what happened through 2023 and 2024. The RBA held rates steady while the Fed began cutting, which briefly supported the Aussie. But when markets realised the RBA might need to cut too — and possibly more aggressively — the Aussie gave back those gains.

Forward Guidance Matters as Much as the Decision

In modern central banking, what the RBA says is often just as important as what it does. Markets are forward-looking, and traders price in expected rate moves well before they happen.

This means the language in the RBA’s post-meeting statement, the Governor’s press conference, and the quarterly Statement on Monetary Policy all move currencies. A single change in phrasing — from “the board remains vigilant” to “the board is open to adjusting policy” — can shift the Aussie dollar by a full cent in minutes.

Increasingly, financial institutions and data analytics firms are using natural language processing to parse central bank communications in real time, trying to detect shifts in tone before human analysts can. It is a reminder that in currency markets, speed and interpretation both matter.

The Transmission Mechanism

When the RBA changes the cash rate, the effect on the currency is not always immediate or linear. Several factors can dampen or amplify the response:

• Market expectations: If a rate cut is fully priced in, the actual announcement may produce little reaction. Surprises move markets.
• Global context: A rate cut during a global risk-off event will hit the Aussie harder than the same cut during calm markets.
• Carry trade dynamics: The AUD has historically been a popular carry trade currency. When Australian rates are high relative to peers, speculative investors borrow in low-rate currencies and park funds in AUD, amplifying demand.

The Bottom Line

Understanding how the RBA sets interest rates is not just an academic exercise. For anyone who trades currencies, sends money overseas, imports goods, or simply wants to understand why their overseas holiday just got more expensive, the cash rate is the starting point.

The next time you see a headline about the RBA holding or cutting rates, look beyond the number. Read the statement. Watch the press conference. The real story is almost always in the nuance.

James Hargreaves is a Sydney-based financial journalist covering currencies and macro markets.