The European system of central banks' primary tool for conducting monetary policy is open market operations. It uses this tool to set the interest rate for very short-term inter-bank loans, which is known as the the overnight cash rate.
Explanation:
The rate at which a depository entity which is usually banks lend or borrow resources in the overnight marketplace with another depository organization, is understood as overnight cash rate. The overnight rate in many places is the interest rate which the central bank establishes to guide monetary policy.
The overnight rate offers the banks with an effective strategy of obtaining short-term funding from central bank depository. Given that a country's central bank controls the overnight rate, it can be implemented as a strong proxy for the motion of short-term interest rates for customers in the wider economy. The greater the overnight rate, the greater the cost of borrowing capital.
