What does the cash rate represent?

The cash rate is the interest rate that banks pay to borrow money from each other overnight in the short-term money market. It serves as a key monetary policy tool used by the central bank, influencing overall interest rates in the economy. Changes in the cash rate can affect borrowing costs for consumers and businesses, thus impacting economic activity and inflation.

By effectively managing the cash rate, the central bank can aim to control inflation and support economic growth. When the cash rate is lowered, it typically encourages borrowing and spending, while an increase in the cash rate generally cools down economic activity by making borrowing more expensive.

In contrast, the other options relate to different aspects of the financial system. The average interest rate for all loans encompasses a broader range of loans beyond just overnight borrowing and is influenced by the cash rate but is not itself the cash rate. The rate of inflation reflects price level changes in the economy, rather than an interest rate. The yield on long-term government bonds pertains to the return investors expect from holding those bonds over a longer term, which can be influenced by the cash rate, but is a different financial concept altogether.