Do banks have to follow the RBA on interest rates?

The Reserve Bank changes the cash rate, but each lender decides what happens to its mortgage customers

When the Reserve Bank of Australia changes interest rates, Australians are accustomed to hearing that banks will “pass on” the decision.

The phrase can create the impression that banks are required to increase or reduce mortgage rates by precisely the same amount.

They are not.

The RBA sets the cash rate target—the benchmark interest rate for overnight lending between banks. It strongly influences the cost of money throughout the economy, but it does not directly set the mortgage rate charged by Commonwealth Bank, Westpac, NAB, ANZ or any other lender.

Each bank makes its own pricing decision.

That means a lender can pass on an RBA increase in full, absorb part of it, delay the increase or leave its mortgage rates unchanged. It can also change rates independently of the RBA.

The question is therefore not simply whether a bank can raise mortgage rates. It is whether doing so is commercially necessary—and whether automatically transferring the entire cost to borrowers is wise.

The latest increase

On 29 September 2026, the RBA increased the cash rate by 0.25 percentage points, taking it to 4.60 per cent.

Australia’s four major banks subsequently announced that they would increase variable mortgage rates by the full 0.25 percentage points, with the changes taking effect on 9 October.

That was a commercial response to the RBA decision—not a direction issued by the central bank.

Fixed-rate borrowers are generally protected until their fixed period expires. Variable-rate borrowers are exposed because the terms of those loans ordinarily permit the lender to change the rate, subject to the contract and applicable notification requirements.

Why banks usually follow the RBA

Banks do not fund every home loan directly from customer deposits. Their funding comes from several sources, including:

• Deposits;
• Domestic and international wholesale borrowing;
• Bonds and other debt instruments;
• Retained capital; and
• Financial markets used to manage interest-rate risk.

When the cash rate rises, some of those funding costs rise as well. Depositors may also demand higher returns on savings accounts and term deposits.

Banks therefore have a legitimate argument that an increase in their costs must eventually be reflected in lending rates.

But that does not mean the relationship is automatic or exact.

A bank’s mortgage rate also reflects competition, credit risk, operating costs, regulatory capital requirements and the profit margin it wants to earn. The cash rate is an important component of mortgage pricing, but it is not the entire calculation.

Passing it on is a choice

A bank can decide to accept a slightly smaller margin to protect its mortgage customers. It might pass on only part of an increase, postpone it or offer targeted relief to reliable borrowers.

Banks routinely exercise this discretion when competing for new customers.

New borrowers and refinancers are often offered discounts that are unavailable to longstanding customers. This demonstrates that mortgage pricing is not simply an unavoidable mathematical consequence of the RBA cash rate.

If a bank can reduce a rate to win a customer, it can consider absorbing part of an increase to retain one.

That does not mean every bank can permanently ignore rising funding costs. It does mean “the RBA raised rates” is not a complete explanation for every mortgage increase.

The public-relations problem

Passing on a rate rise in full may protect bank margins, but it can also create poor public relations.

Mortgage customers do not experience an interest-rate rise as an abstract adjustment in monetary policy. They experience it as less money for food, electricity, insurance, transport and discretionary spending.

The reputational risk becomes greater when a bank:

• Increases mortgage rates immediately;
• Delays or limits increases to deposit rates;
• Reports strong profits;
• Offers better rates to new customers than existing ones; or
• Tells distressed borrowers to reduce spending while preserving its own margin.

Banks are commercial businesses and must remain profitable. They must also manage credit risk and retain the confidence of depositors and investors.

However, there is a difference between remaining profitable and treating every RBA increase as an unquestionable instruction to charge borrowers more.

Customer loyalty is difficult to demand when pricing decisions appear to flow in only one direction.

Would holding rates back undermine the RBA?

There is another side to the argument.

The RBA raises the cash rate because it wants tighter financial conditions. Higher borrowing costs reduce household spending, discourage some investment and slow demand across the economy.

If every bank absorbed an increase, monetary policy would become less effective.

Banks are therefore part of the mechanism through which an RBA decision reaches households and businesses. That explains why mortgage rates usually move in the same direction as the cash rate.

Yet monetary policy does not require every bank to impose an identical increase on every customer. Competition is still supposed to operate.

One lender might accept a smaller margin. Another might reward customers with lower loan-to-value ratios. A customer-owned bank may take a different view from a listed bank accountable to shareholders.

The RBA establishes the pressure. The banks decide how that pressure is distributed.

What mortgage holders can do

Borrowers do not necessarily have to accept the first rate offered to them.

A mortgage customer can ask the bank’s retention team for a review, compare the rate being offered to new customers, consider refinancing and examine whether an offset account or additional repayments would reduce interest.

The comparison should include fees, discharge costs, introductory-rate conditions and the remaining loan term—not merely the advertised interest rate.

Borrowers experiencing genuine difficulty should contact their lender early and ask about hardship assistance. Silence and missed payments reduce the available options.

Most importantly, customers should remember that a variable mortgage rate is the bank’s price. It is not a rate personally assigned to the borrower by the RBA.

The Times view

Banks are not obliged to imitate every RBA decision percentage point for percentage point. They follow because their costs, margins and commercial strategies encourage them to do so.

Sometimes a full increase may be justified. Sometimes absorbing part of it could preserve customers, strengthen loyalty and demonstrate that the relationship extends beyond the next profit announcement.

The cash rate belongs to the Reserve Bank. The mortgage rate belongs to the lender—and so does responsibility for the decision.