tradewind
Member
what's the definition of a cash rate and how does a cash rate differ from market interest rate?
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cash rate (1 Viewer)
- Thread starter tradewind
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tradewind
Member
how does the cash rate relate to market interest rate?
Changes to the cash rate will result in changes to market interest rates as financial institutions will change their rates accordingly. e.g. if the cash rate rises, financial instituations will raise interest rates to recoup these additional costs
tradewind
Member
so the RBA sets the cash rate which then determines the market interest rate 
but what is a short term money market?
but what is a short term money market?grimreaper
Member
The short term money market is where the banks and financial institutions settle accounts with each other at the end of the day.
Basically, the RBA enters the short term money market and uses domestic market operations in order to keep the cash rate at the level which was decided at their monthly meeting. By buying and selling Commonwealth Gov securities to institutions in the STMM the RBA affects the money supply. Changing the supply will affect the price of money in the STMM i.e. the cash rate
tWiStEdD
deity of ultimate reason
Interest rates refer to the price of money as determined by forces of demand and supply in the money market.
The cash rate is essentially the rate of interest as set by the RBA. Yes, it is also the rate of interest used in the short term money market, but only in transactions with or by the RBA. The cash rate is reached through sales of commonwealth govt securities.... i.e. loans to the govt for a set period of time at a set rate of interest that remove a certain amount of money from circulation... since the govt has it now, right?
The market interest rate however is the rate as used by commercial banks and non-bank financial institutions. This is the Roi us that is influenced by forces of demand and supply for liquidity in the money market.
The cash rate refers to government intervention in the money market and the RBA's monetary policy stance. The market interest rate refers to the market itself on a more general scale and relates to the rate of interest that prevails.
The cash rate is essentially the rate of interest as set by the RBA. Yes, it is also the rate of interest used in the short term money market, but only in transactions with or by the RBA. The cash rate is reached through sales of commonwealth govt securities.... i.e. loans to the govt for a set period of time at a set rate of interest that remove a certain amount of money from circulation... since the govt has it now, right?
The market interest rate however is the rate as used by commercial banks and non-bank financial institutions. This is the Roi us that is influenced by forces of demand and supply for liquidity in the money market.
The cash rate refers to government intervention in the money market and the RBA's monetary policy stance. The market interest rate refers to the market itself on a more general scale and relates to the rate of interest that prevails.
tradewind
Member
thanks twisted for clarifying the differences. much appreciated
tWiStEdD
deity of ultimate reason
The short term money market is more accurately named exchange settlement accounts (ESAs). These are bank accounts for banks which much be kept with the RBA, and must always be in credit, to 'settle' the flow of money that is passed about through cheques.
say a commonwealth bank client, bob, gives larry, a NAB client, a cheque for $100. Larry cashes the check with his bank and has to wait three (3) days to be paid (while the banks work their magic)... in the end Larry's money is moved from the Commonwealth bank's ESA to the NAB's ESA. You'll notice that liquidity has not changed, there is still just as much money out there it has just moved places.
This is how the RBA limits the supply of money (liquidity), since they can easily buy and sell govt securities and bonds to banks without much hassle and at the same time affect and influence interest rates (which is thanks to the forces of demand and supply in the money market).
Say the RBA takes a loose monetary stance. They want to lower interest rates and to do this they must increase the supply of money (liquidity). Say the Cth bank has a Commonwealth Govt Security worth say.... $100 (unrealistic, but play along, okay?) @ 5% for a period of 10 years. i.e. treasury owes the bank $100m plus interest after the 10 years is up. The RBA would say to the Cth bank "we'll pay you $170 for that security!" The Bank would do its sums and find out that they're getting a tiny yield of 2% of their original investment, but agree anyway because they're still making money. The RBA would write a CHEQUE for the $170 and give it to the Cth bank, who now have $170 more in their exchange settlement account. They therefore have more money in circulation, and the RBA is hoarding less.
To increase interest rates, the RBA would sell old Cth Govt securities cheaply. So say the RBA has a security worth $100 @ 4.25% over 12 years, they may sell it for $150 (if they were insane). At any rate, the banks like to make a profit, so the Cth Bank might buy it, and in doing so they will write a CHEQUE to the RBA who will debit the Cth Bank's ESA by $150. Thus, money has gone out of circulation; a decrease in supply and ceterus paribus a rise in price.
say a commonwealth bank client, bob, gives larry, a NAB client, a cheque for $100. Larry cashes the check with his bank and has to wait three (3) days to be paid (while the banks work their magic)... in the end Larry's money is moved from the Commonwealth bank's ESA to the NAB's ESA. You'll notice that liquidity has not changed, there is still just as much money out there it has just moved places.
This is how the RBA limits the supply of money (liquidity), since they can easily buy and sell govt securities and bonds to banks without much hassle and at the same time affect and influence interest rates (which is thanks to the forces of demand and supply in the money market).
Say the RBA takes a loose monetary stance. They want to lower interest rates and to do this they must increase the supply of money (liquidity). Say the Cth bank has a Commonwealth Govt Security worth say.... $100 (unrealistic, but play along, okay?) @ 5% for a period of 10 years. i.e. treasury owes the bank $100m plus interest after the 10 years is up. The RBA would say to the Cth bank "we'll pay you $170 for that security!" The Bank would do its sums and find out that they're getting a tiny yield of 2% of their original investment, but agree anyway because they're still making money. The RBA would write a CHEQUE for the $170 and give it to the Cth bank, who now have $170 more in their exchange settlement account. They therefore have more money in circulation, and the RBA is hoarding less.
To increase interest rates, the RBA would sell old Cth Govt securities cheaply. So say the RBA has a security worth $100 @ 4.25% over 12 years, they may sell it for $150 (if they were insane). At any rate, the banks like to make a profit, so the Cth Bank might buy it, and in doing so they will write a CHEQUE to the RBA who will debit the Cth Bank's ESA by $150. Thus, money has gone out of circulation; a decrease in supply and ceterus paribus a rise in price.
ameh
dirty trick
twistedd, u r my new best friend