Cash rate

Definition

The cash rate is the interest rate charged on overnight loans between financial institutions in an economy. It is set by the central bank and influences other interest rates in the market, including those for bonds and loans.

5 Must Know Facts For Your Next Test

1. The cash rate serves as a benchmark for short-term interest rates in the financial system.
2. Changes in the cash rate can influence bond yields and prices.
3. A lower cash rate typically leads to higher bond prices, while a higher cash rate results in lower bond prices.
4. The central bank adjusts the cash rate to control inflation and stabilize the economy.
5. Yield curves often shift based on expectations of future changes in the cash rate.

Review Questions

• How does a change in the cash rate affect bond prices?
• What role does the central bank play in setting the cash rate?
• Why is the cash rate considered a benchmark for short-term interest rates?

Related terms

Yield Curve: A graph showing the relationship between bond yields and maturities.

Central Bank: The national institution that regulates monetary policy and sets key interest rates, including the cash rate.

Bond Yield: The return an investor realizes on a bond, often influenced by changes in interest rates such as the cash rate.