GaDaMIt said:
These are confusing the hell out of me
Interest rate = rate banks set on their borrowers
Lending rate = rate banks set on their borrowers
Cash rate = rate banks are charged for borrowing
Borrowing rate = rate banks are charged for borrowing
interest rate > cash rate
lending rate > borrowing rate
this is leading me to think that
interest rate is the same thing as lending rate
and
cash rate is the same thing as borrowing rate
so am i right? or what?
could someone please clearly identify each of these in either case of me being right or wrong?
No you are wrong.
The term "interest rate" is generic. The cash rate, borrowing rate, lending rates etc are all examples of "interest rates".
Kind of like you would say that a "football team" is the sydney swans, or newcastle knights, or sydney fc etc. They are all kinds of football teams.
The interest rate is just a percentage of the principal that is charged on the fee. I.e. 6%.
When you hear in the news someone say "the interest rate has risen to 6%" they are talking about one specific type of interest rate, and that is the "cash rate". Thats because it is a formal rate target that the RBA has set through monetary policy. But this does not mean that the interest rate is simply the cash rate.
The lending rate is the interest rate that a bank would charge to people who take out a loan (i.e. a mortgage), whereas the deposit rate (i think you have referred to it as the borrowing rate, howevor this is not the best term to use) is the interest that you earn when you hold a bank account.
Because banks must make a profit, the lending rate is always higher than the borrowing rate (they collect the differential in the form of profit).
The Cash rate is a very important type of interest rate in the economy. Basically your understanding wont be that detailed because you have not yet looked at the mechanisms of monetary policy. I will attempt to explain simplistically what the cash rate is.
The cash rate is a special type of interest rate that is charged to banks who hold exchange settlement accounts (ESA) with the rba. Basically an ESA acount is an account that is used to settle all the transactions between banks (i.e. you withdraw $100 from your CBA bank account from a St George ATM). Banks will either have a surplus, or a shortage of funds after each day of trading (i.e. they will owe other banks more than they are owed, or they are owed more than they owe). Banks will then borrow funds from each other every night, so that they can settle the accounts with other banks. They borrow at the "cash rate". The RBA sets the cash rate by selling or buying government securities and increasing or decreasing the supply of funds in the market. This is how monetary policy operates.
If the above paragraph doesn't make any sense, just understand that the cash rate is the interest rate for the banks accounts at the RBA and it is the rate that is altered within monetary policy.
