Interbank Rate Explained: How It Impacts Australian Finance in 2025

The interbank rate rarely makes headlines, yet it’s one of the most influential numbers in Australia’s financial system. Often operating behind the scenes, this rate quietly determines how much banks pay to borrow from each other—and, by extension, influences everything from home loan interest rates to the cost of business finance. In 2025, with global volatility and new Reserve Bank of Australia (RBA) frameworks in play, understanding the interbank rate is more important than ever.

How the Interbank Rate Works in Australia

At its core, the interbank rate (often called the overnight cash rate) is the interest rate charged on short-term loans between Australian banks. These transactions happen daily as banks adjust their cash positions to meet RBA requirements. If a bank ends the day with a shortfall, it borrows from another with a surplus—at the interbank rate.

• Benchmark for Borrowing: The interbank rate serves as the foundation for most other interest rates in the economy, including mortgages, personal loans, and business lending.
• RBA’s Target: The Reserve Bank sets a target for this rate as a key tool in monetary policy. Its decisions directly impact the interbank rate, which then ripples through to consumers and businesses.
• Market-Driven—But Guided: While banks negotiate rates among themselves, the RBA influences liquidity to keep the rate close to its target.

For example, when the RBA increased its target cash rate to 4.35% in late 2024 in response to persistent inflation, interbank lending costs rose almost instantly. By early 2025, the rate was being closely watched as signs emerged of the RBA considering a pause—or even a cut—amid slowing economic growth.

Why the Interbank Rate Matters to Everyday Australians

You might never interact with the interbank market directly, but its effects are far-reaching:

• Mortgage Rates: When the interbank rate rises, banks’ funding costs increase. Lenders typically pass these costs on to borrowers via higher variable home loan rates.
• Business Loans: Small business finance is often pegged to the interbank rate. Even modest changes can affect cash flow and investment decisions for thousands of SMEs.
• Savings and Term Deposits: When the rate is high, banks may offer more attractive rates to savers to secure funding—though not always at the same pace as lending rates rise.

Consider this real-world scenario: In early 2025, as the interbank rate remained elevated, major banks such as CBA and Westpac lifted their home loan rates for the fifth time in a year. Savers, however, saw only modest increases in term deposit rates, highlighting the competitive pressures and margin management that banks juggle in a high-rate environment.

2025 Trends: Regulation, Volatility, and Digital Disruption

The interbank market is not immune to change. Here are three key trends shaping the landscape in 2025:

1. New RBA Policy Framework: The RBA’s 2024-25 review introduced a greater focus on transparency and clearer communication about its cash rate operations. This has led to more predictable movements in the interbank market, but also means policy changes can move markets faster than before.
2. Global Volatility: With international central banks tightening or loosening rates in response to shifting economic data, the Australian interbank rate has seen more day-to-day volatility. Currency fluctuations and offshore funding costs have played a larger role in setting local rates.
3. Fintech Disruption: New entrants, including neobanks and digital lenders, are participating in the interbank market, increasing competition and sometimes adding to short-term liquidity swings. Some fintechs have started offering products with rates pegged directly to the interbank rate, giving consumers more transparency—but also more exposure to market moves.

For example, in March 2025, a sharp movement in the US Federal Reserve’s policy rate saw the Australian interbank rate spike by 0.15% in a single day, forcing the RBA to inject extra liquidity to stabilise the market. This volatility fed through to short-term business loans and even impacted rates on some digital savings accounts linked to the market.

The Bottom Line: Staying Informed Pays Off

While the interbank rate may seem distant, its impact on your wallet is direct and immediate. Whether you’re applying for a mortgage, running a business, or just parking your savings, keeping an eye on movements in the interbank rate—and understanding the forces behind it—can help you make smarter financial decisions. With 2025 shaping up as a year of continued uncertainty and rapid change, staying informed is more valuable than ever.