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What is the difference between the cash rate and interest rate? I (in Australia) googled cash rate and according to wikipedia it is the "central bank charges on overnight loans between commercial banks."

If anyone can explain what "overnight loans" are and provide a simplification of this process would be really appreciated. Based on some superficial readings, the cash rate influence markets' interest rate? It would also be nice if someone can provide a definition for the respective terms. Many thanks.

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  • $\begingroup$ Kurtosis explains the cash rate. Just a point on the the title question (“What is the difference between the cash rate and interest rate!”), “interest rate” is extremely vague. In any country, there are many different instruments, each with its own associated interest rate. People often refer the policy rate as “the” interest rate, but that is being extremely loose with terminology. $\endgroup$ – Brian Romanchuk Aug 25 '20 at 23:00
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In Australia, the cash rate is a volume-weighted average interest rate of unsecured overnight loans among banks which are members of the Reserve Bank Information and Transfer System (RITS). The cash rate is also known as AONIA (the Australia Overnight Index Average).

Overnight loans are just like they sound: Perhaps Bank A needs to make payments the next day but has cash coming in to cover those payments in two days. So Bank A borrows money overnight to make the payments and bridge the gap to when money covering the payments arrives. Banks do this all the time for one another since perfectly matching up the timing of cash inflows and outflows is difficult.

The Reserve Bank announces target rates for the overnight rate and then conducts "open market operations" (offering overnight loans, for example) to hold the market level of interest on overnight loans to be close to their announced target.

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