Domestic Market Operation Question (1 Viewer)

[jchoi]

Hey guys, I was just reading over my year 11 notes today, and I'm sort of confused about an aspect of Domestic market operation.

I get the whole ES account etc, but I'm wondering why excess demand of overnight cash loans will lead to an increase in cash rate.

 

[moll.]

Hey guys, I was just reading over my year 11 notes today, and I'm sort of confused about an aspect of Domestic market operation.

I get the whole ES account etc, but I'm wondering why excess demand of overnight cash loans will lead to an increase in cash rate.

Higher demand = higher prices, or in this case, higher rates of return on assets which are more scarce.

 

[Bainesy]

demand and supply, as is everything in eco

increase in demand moves demand curve right, which means the cash rate rises on the short term money market

 

[gnrlies]

Its not so much an excess of demand as the RBA cannot influence this, but rather a shortage of supply. If the bank sells commonwealth government securities it will take cash out of the cash market. As others have said, supply and demand factors will essentially raise the cash rate (which is effectively the price paid for borrowing cash to settle interbank lending).

In practice however central bank communication to the public is the most important. The central bank doesn't usually have to do a whole lot with regards to CGS other than maintaining the rate within normal variance. Communication of the target rate is enough to achieve it as markets usually respond accordingly.