As part of its responsibility for monetary policy, the Reserve Bank Board sets a target for the cash rate. This is the rate at which banks borrow from and lend to each other on an overnight, unsecured basis. The rate is determined by the demand and supply of exchange settlement balances that commercial banks hold at the Reserve Bank. Through its open market operations, the Reserve Bank alters the volume of these balances so as to keep the cash rate as close as possible to its target.
The Reserve Bank undertakes transactions in the foreign exchange market on a regular basis. Many of these transactions arise out of the provision of foreign exchange services to clients, with the Australian Government the Bank's largest client. Transactions are also undertaken in the foreign exchange market, as well as foreign asset markets, in managing Australia's foreign currency reserves. Foreign currency reserve assets are held on the balance sheet of the Bank, with the currency allocation, asset allocation and interest rate risk on investments managed against benchmark targets. Foreign currency reserves are deployed from time to time to effect policy operations in the foreign exchange and domestic cash markets.