Influence of the Cash Rate in Interest Rates

• Domestic Market Operations by the RBA - DMOs

  The way that the RBA influences the amount of funds held in ESA's is by selling and buying existing Australian government securities to and from the banks
• Exchange Settlement Accounts (ESA)

  How providers of payments services settle obligations that have accrued in the clearing
• Decreasing the cash rate - Loosening Monetary Policy

  The RBA will buy securities from commercial banks and exchange additional deposit funds in their ESA's. This will increase the supply of settlement funds, putting a downward pressure on the overnight cash rate.
• Increasing Cash Rate - Tightening Monetary Policy


  When the RBA sells securities to a bank, it withdrawals money from the seller's ESA, subtracting from total ESA balances. This decreases the supply of settlement funds, putting an upward pressure on the overnight cash rate.
• RBA Intervention in Short-term Money Market

  The RBA constantly intervenes to maintain the cash rate at its target level
• Increase in Cash Rate

  Makes it more expensive for financial institutions to obtain funds in the short-term money market. This increases the overall cost structure of borrowing, flowing through to longer-term and mortgage interest rates as banks attempt to maintain profit margins
• Reduction in Cash Rate

  Lowers the cost of borrowing for banks in the short-term money market. Leads to lower lending interest rates.
• Decrease in Interest Rates

  Encourages consumption and investment spending, increasing level of economic activity
• Increase in Interest Rates

  Deters consumption and investment spending, reducing overall level of economic activity