Cash Rate

Submitted by Share Trading on 17 March, 2010 - 16:20

Cash rate refers to the interest rate that a financial institution pays for borrowing or charges to the lend funds in the money market in an overnight basis. According to the Reserve Bank of Australia (RBA) cash rate is the operational target for implementing monetary policy. According to RBA, the interest rate that a financial institution (a bank) pays or charges to another bank for borrowing or lending money in an unsecured basis is the cash rate, something that is also known as the interbank overnight rate. The reserve bank publishes the cash rate on an everyday basis based on the information provided by the banks. RBA has been doing it since June 1998.

Cash Rate and Its Impact on the Stock Exchange

Information like the daily cash rate is considered very important for the traders who deal with the stock exchange. The share market gets affected by any rate change instantly due to the fact that based on this kind of information, market analysts determines which one is the more attractive investment among cash, bonds and shares. Analysts usually makes adjustments to their modeling based on the possible impacts that the companies will have in their cost of borrowing based on the change in the rate. In addition to this, the change in cash rate can have impact on the consumer behaviour and discretionary spending as well, something that can have positive or negative impact in the stock market.

An investor who is investing in the market for about 5 to 7 years may observe significant changes in the interest rates and it is important for the investors to determine the current position of the market in the interest rate cycle to have a proper understanding about in which direction the share market is heading. It is important for the investors to follow the announcements made by the Reserve bank in order to determine what type of adjustment it can make to the cash rate.

Glossary List

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