In order to achieve its operating target of 2% to 3% CPI inflation over the economic cycle, the Reserve Bank of Australia (RBA) uses the monetary policy to great effect. Monetary Policy refers to actions by the RBA to influence the supply and cost of credit in the economy. The main tool of monetary policy is the RBA's use of market operations. Market Operations refer to the buying and selling of Commonwealth Government Securities (CGS) by the RBA. CGAs comprises of Treasury bonds, Treasury notes and Treasury indexed bonds. However before moving further ahead, it is important that we understand the Cash Market and the Cash Rate.

The benchmark determinant of money market interest rates is the official cash rate. The official cash rate is an overnight interest rate and is the RBA's key monetary lever. The RBA conducts open market operations to maintain the cash rate at its specified...