Influencers might be a recent phenomenon, but there’s one that’s been in the business for decades with a reach tallying millions of people and the country’s biggest companies.
The Reserve Bank is not the kind of influencer you see on social media, although it does have an Instagram account with 12,000 followers. It also doesn’t control the interest rates set by the banks you and I visit.
Reserve Bank governor Michele Bullock. The RBA will deliver its next cash rate target decsion in February.Credit: Aresna Villanueva
So, why are changes our central bank announces almost always reflected in home loan rates, and why don’t they seem to flow through as much to interest rates on people’s savings?
To understand the process, we’ll need to dive into the secret life of banks, which the Reserve Bank explains on its website.
When we discuss the Reserve Bank’s monthly (now to be eight times a year) rate decisions, we’re usually referring to the cash rate target: a guide it sets for the interest rate commercial banks pay to borrow funds from other banks.
Lending and borrowing between banks mostly take place in the Australian cash market, also known as the “overnight market”. But it’s a bit of a misnomer: banks are not nocturnal beasts. Most of the interbank activity actually occurs during the day.
Every time the Reserve Bank changes its cash rate target, it tweaks the upper and lower bounds of this corridor, thereby effectively determining borrowing and lending costs between the banks.
If a bank determines it has more money than it needs on a given day, it will lend the excess to other banks on the overnight market. If, on the other hand, a bank faces a shortfall in funds to service customer needs, it will borrow from other banks. Basically, the “overnight market” is called that because any cash borrowed by banks is repaid the following day.
The overnight cash rate (a weighted average of the interest rates at which banks borrow and lend to each other overnight) isn’t fixed. It fluctuates during the day depending on how much money is being transacted between the banks. But the Reserve Bank’s cash rate target is a huge constraint on how much banks can expect to pay or receive in interest on their dealings in the overnight market.
The Reserve Bank doesn’t set your interest rates, but here’s why we watch
14
0
04.01.2024
Influencers might be a recent phenomenon, but there’s one that’s been in the business for decades with a reach tallying millions of people and the country’s biggest companies.
The Reserve Bank is not the kind of influencer you see on social media, although it does have an Instagram account with 12,000 followers. It also doesn’t control the interest rates set by the banks you and I visit.
Reserve Bank governor Michele Bullock. The RBA will deliver its next cash rate target decsion in February.Credit: Aresna Villanueva
So, why are changes our central bank........
© The Sydney Morning Herald
visit website
login
who are we?
contact us
qosheapp
Toi Staff
Gideon Levy
Belen Fernandez
Andrew Mitrovica
Mort Laitner
Nikkei Editorial
Rami G Khouri
Ali Fathollah-Nejad
