As banks settle all inter-bank transfers overnight, the central bank can regulate the rate paid for cash by the sale or buy back of bonds and other government issued securities (these are known as domestic market operations).
As the sale or purchase of bonds affects the supply of money, then the interest rate will change to reflect its availability.
The rate is set by the central banks regularly, usually every month in Australia and every six weeks in New Zealand and forms one of the main tools to manage monetary policy.
[3] The former RBA Governor Philip Lowe said "The less frequent and longer meetings will provide more time for the board to examine issues in detail and to have deeper discussions on monetary policy strategy, alternative policy options and risks, as well as on communication," [3] In New Zealand, the official cash rate (OCR) is set by the Reserve Bank of New Zealand to meet the inflation target specified in the Policy Targets Agreement.
[4] The OCR was introduced in March 1999 and was reviewed eight times a year up to 2015 by the Reserve Bank of New Zealand.
The most crucial part of the system is the fact that the Reserve Bank sets no limit on the amount of cash it will borrow or lend at rates related to the OCR.
As a result, market interest rates are generally held around the Reserve Bank's OCR level.
The practical result, over time, is that when market interest rates increase, people are inclined to spend less on goods and services.