Understanding the Mechanics of Monetary Policy: Beyond the Headline Rate
Understanding the Mechanics of Monetary Policy: Beyond the Headline Rate
With the Reserve Bank of Australia’s cash rate target currently sitting at 3.85% (effective 4 February 2026), it is timely to revisit what this figure represents and how it functions as the primary lever for economic management in Australia.
While often discussed solely in the context of mortgage repayments, the cash rate is technically the interest rate on unsecured overnight loans between banks. It serves as the RBA’s operational target for managing liquidity in the money market.
how does this mechanism work? The RBA maintains this target by creating a “corridor.” Banks can deposit funds with the RBA earning slightly below the target, or borrow slightly above it. The RBA then transacts in the money market to manage supply and demand, keeping the actual rate close to the target.
The Strategic Objectives The Monetary Policy Board meets eight times a year to review this setting. Their decision-making framework is guided by two defined objectives:
Inflation Control: Keeping consumer price inflation between 2 and 3 per cent.
Employment: Achieving sustained full employment.
Understanding these fundamentals provides better context on how interest rates influence not just lending costs, but broader economic activity and national prosperity.
The next update from the Board is scheduled for 17 March 2026.
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