The cash rate is the interest rate financial institutions pay to borrow or charge to lend funds in the money market on an overnight basis. The Reserve Bank of Australia uses a narrower definition of the cash rate as an operational target for the implementation of monetary policy. The Reserve Bank of Australia's measure of the cash rate is the interest rate which banks pay or charge to borrow funds from or lend funds to other banks on an overnight unsecured basis. This measure is also known as the interbank overnight rate. The Reserve Bank of Australia calculates and publishes this cash rate each day on the basis of data collected directly from banks. This measure of the cash rate has been published by the Reserve Bank of Australia since June 1998.
Share market investors also have to keep a close eye on Reserve Bank announcements. Any rate change by the Reserve will flow through to the money markets immediately via a move in the cash rate but stocks will also rise or fall as strategists assess whether shares are more attractive investments than cash and bonds. Analysts will feed rate changes into their modeling to work how out companies will be affected by borrowing costs as well as the impact of changed consumer behaviour and discretionary spending and this can quickly flow through to share prices.
Anyone investing over a five-to-seven year period will see major changes in interest rates and investors need to know where we are in the interest rate cycle for an indication of where the stock market is headed. Investors should be reading the Reserve’s statements and announcements for pointers to its thinking on the economy and what action it might take on rates.
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