Reserve Bank of Australia "raises interest rates"?

When the Reserve Bank of Australia "raises interest rates" (as they have just done by 0.25%), how does that affect the interest rates actually offered by banks who can set them at whatever they like in order to attract business just like every other competitive market?

Update:

In short: how does the Reserve Bank's interest rate influence what home loan lenders actually offer to customers?

Also: why can't interest rates be determined by supply and demand rather than by the interests of the government?

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  • Anonymous
    1 decade ago
    Favorite Answer

    when central bank increase key interest rate (in this case is RBA), it means that supply of reserves in banking system (central bank is the supplier of reserves) will fall, which in turn makes commercial banks to lend less fund to borrowers by tightening lending; less funds for lending will cause loan rates to rise as supply of lending funds by banks will fall

    note that inter-bank rate (interest rate charge by one bank to another for lending overnight, and also used by central bank to determine supply of reserves) will determine other interest rates in the economy

    Source(s): economics reader
  • Anonymous
    1 decade ago

    Australia is doing great. I'm not surprised that the Reserve Bank of Australia will raise the policy rate far ahead of other countries on earth. The reason is mainly because of strong economy, and to attract business worldwide. It will also keep the Australian dollars on track. Yes, you have to pay more, but your income will improve very soon. And Australia is the second best place to live after Norway. The great thing is coming to Australia for sure.

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