The cash rate is essentially the interest rate set by Reserve Bank of Australia (RBA) and represents the rate banks have to pay to borrow the money they then lend to you. As the cash rate is increased, it cost more for the banks to borrow and they then pass extra cost on to you.

This is why the interest rate on your mortgage increases. Your interest rate on your mortgage will always be more than the cash rate because of the institutions between the wholesale debt market and you need to generate a margin.

Why does the RBA increase the cash rate? To help moderate economic inflation.

What is inflation?

Inflation very basically, represents how quickly the cost of things rise.

A certain level of inflation is good and essential to keeping economies growing. However, too much inflation stifles how well economies operate. The RBA aims to keep inflation at a rate of between 2-3% on average.

Why is the cash rate increased during times of too much inflation?

When inflation exceeds the target range for too long one strategy that can be implemented is for the RBA to increase the cost of borrowing (through cash rate increases). This theoretically means people have to spend more on debt repayments which leaves less money to spend on other things. This is then expected to reduce the amount of money going around in the economy, consequentially, slowing growth and therefore inflation as the level of demand for things comes back in line with the supply of said things.