Cash rate/interest rate (1 Viewer)

[d_a_n_z]

Im not sure if this is really stupid question but im just having trouble getting my head around the differnece between teh cash rate set by teh RBA, and the interest rates set by the RBA...?

 

[seremify007]

The cash rate is the interest rate that financial institutions pay to borrow or charge to lend funds in the money market on an overnight basis. This measure is also known as the interbank overnight rate

The cash rate is consequently very important, because of its strong relationship to market interest rates. For example, mortgage and business loans rates tend to move in line with movements in the cash rate.


The Reserve Bank’s influence over the cash rate comes from the changes in the banks demand for exchange settlement funds. For example, payments to the banks by the Reserve Bank add to exchange settlement funds.

Can you explain that section a bit more for me?

I thought I understood this pretty well... but I guess not. I thought the way the RBA controlled interest rates was by buying/selling securities to the banks, and then that would be controlling the level of funds available for the private sector to borrow, thus affecting interest rates.

 

[sunjet]

They buy and sell government bonds/securities to Banks, if they sell it means there is a shortage of funds because banks have to take money out of their ESA's to pay for these and thus the cash rate goes up and so do interest rates. If the RBA buy bonds it creates a surplus of funds in ESA's meaning the cash rate goes down and so do interest rates.

 

[azza_3761]

Aren't the ESA's only there for banks to settle accounts with each other?

 

[sunjet]

and the RBA.

 

[seremify007]

Thanks! That's the little bit which I didn't realise- the ESAs are what is used to buy the securities.