Question

Distinguish between the Cash Rate and the Target Cash Rate and explain both the Australian corridor system as it existed until March 2020, and the details and purpose of the main changes in monetary policy which were announced at the end of that month.

Answer 1

The cash rate is the rate of interest that is charged by the central bank of Australia on the loans given to other banks. This can also be understood as the base interest rate which is levied on the loan. On the other hand, the Target Cash Rate is the rate of interest that is charged on the overnight funds based on the market rate.

The Reserve Bank is the governing body that takes decisions regarding the formulation and implementation of the monetary policies. The Reserve Bank is also responsible for setting the target cash rate. The Reserve Bank has also set the target on the 3-year Australian Bond on its yield since the year March 2020 and the cash target rate was set around 0.25%. The other rate of interest varies due to the interest rates of the bonds and the borrowers and lenders also affected by the monetary policy laid by the reserve bank. A policy measure was also introduced by the Reserve Bank of Australia which aims at reducing the target can rate to a level of 0.25%. To encourage and smooth the functioning of the bonds issued by the government the reserve Bank also decided to purchase the bonds. To maintain liquidity the Reserve Bank also injected $90 billion for the collateral funding. This was done for providing the credit facility for small and medium businesses so that they can manage to survive. This was the purpose of changing the monetary policy.