An earlier version of this paper was prepared for the autumn meeting of central bank economists held by the Bank for International Settlements on 16-17 November 1993. I am indebted to Geoff Shuetrim and Nick de Roos for invaluable research assistance and to colleagues at the Reserve Bank of Australia for comments and discussion. The views are those of the author and are not necessarily those of the This paper explores the relationship between the cash rate and interest rates set by financial intermediaries and interest rates set in auction markets. It presents estimates of the average degree of pass-through of cash rate changes to these other interest rates. It also presents a model of the spread between banks ' lending rates and the cash rate, and then uses the model to analyse developments in bank lending spreads over recent years. The paper argues that while banks ' average lending spreads did not widen in the early 1990s, the margin between lending rates and the cash rate did increase. It examines the reasons for this change, paying particular attention to the roles played
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