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 also operates in the foreign exchange market to meet the needs of its clients, mainly the Australian Government, and to manage Australia's international reserves. On occasion, the Bank enters the foreign exchange market to influence the level of Australia's exchange rate or to address disorderly market conditions.