The RBA cash rate or cash rate target, is Australia's official interest rate.
The Reserve Bank of Australia (RBA) meets eight times a year to decide whether the rate should be raised, lowered or remain the same.
The cash rate acts as a benchmark for banks and lenders to use when setting interest rates on their financial products.
It has a strong impact on the stock market because it affects borrowing costs, investor sentiment, corporate profits, and the relative attractiveness of equities.
When the cash rate is low, interest earned on savings and bonds drops, making stocks (especially high-dividend ones) more attractive.
The cash rate remained at 4.35% throughout all of 2024, before it was cut to 4.10% in February 2025.
At the last meeting on the 1st of April the RBA left the official cash rate unchanged.
The current official cash rate is 4.10%.
Following the cut, the big four banks (and others) passed on the rate cuts to customers.
However, experts and banks are predicting that more rate cuts are in store during 2025.
The next RBA Board meeting and Official Cash Rate announcement will be on the 20th May 2025.
According to Canstar, all of the big four banks anticipate further cash rate cuts in 2025.
Meanwhile, the ASX Rate Indicator tool shows market expectations of a change in the Official Cash Rate (OCR) set by the Reserve Bank of Australia.
Although it isn't guaranteed, the indicator calculates a percentage probability of an RBA interest rate change based on the market determined prices in the ASX 30 Day Interbank Cash Rate Futures.
At the time of writing the ASX 30 Day Interbank Cash Rate Futures May 2025 contract was trading at 96.02, indicating a 62% expectation of an interest rate decrease to 3.60% at the next RBA Board meeting.
This would be a 50 basis point change.
In general, rate cuts help ASX stock valuations.
Stock prices are often based on the present value of future cash flows.
A lower RBA cash rate reduces the discount rate used in these models, which raises the present value of expected earnings and thus higher stock valuations.
Lower interest rates also means lower loan repayments, potentially leaving households with more disposable income.
This stimulates demand in the economy, benefiting sectors like retail, real estate, construction, and financials.
The Motley Fool's Tristan Harrison reported earlier this week on 2 stocks that could benefit from an interest rate cut:
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