How does a central bank raise/lower interest rates?

When the central banks raise/lower interest rates do they do so by electronically changing the interest rate on a particular instrument or do they just issue a statement.

Thanks

Nut

Let me guess... They do both??

Lol. They do? Which instrument?

Nut

The instrument is purely internal to banks i suppose.

It is probably even internal to central banks.

Retail banks see the rate and pay the rate...

It really depends on the central bank, but most of them do it by engaging in 'Open Market Operations'. That said, central banks will differ how they execute this also.

For example, in Australia the RBA controls the supply of money by controlling what is known as 'Exchange Settlement Funds' (ES funds). The way it works is that each bank in Australia must hold an an ES account with the RBA. ES accounts can only be funded with ES funds. ES funds cannot be transfered into 'real' money. When bank A wants to settle cash with bank B, they did it by transferring ES funds between their ES accounts (all banks settle through a RBA system called RITS).

If the RBA wants to increase interest rates, they will reduce the amount of ES funds avaliable for banks to settle with (normally buy buying up AUD bonds and taking ES funds out of the system). This means that if bank A needs to pay bank B, bank A will need to borrow ES funds from bank c at a higher rate. Likewise if they want to decrease rates, they increase the amount of funds available by selling bonds and injecting ES funds into the system.

EDIT: WOOT! 100 Posts! I am Evil Homer, I am Evil Homer!

Thanks for the answers. I was hoping that I could place the relevant instrument on my quote board.

Nut

Look for the overnight cash rate then...

Thank you