How does the RBA actually change the interest rates?

The intricacies of the method that results in interest rate changes are usually gone unexplained and assumed to be obvious. When the media reports about interest rate increases and decreases, we think of a switch or a message sent to the banks that it must also follow or suffer the consequences. This could not be further from the truth, central banks instead go through a rigorous progress which has been designed to ensure the cash target rate is met. The following attempts to detail a rudimentary explanation.

Banks do not use ordinary cash to trade amongst themselves and the RBA, instead they use Exchange Settlements which are extremely similar to cash and are used to conveniently borrow or lend with each other. These loans very much like our own deposits to the bank incur a percentage of interest this is known as the cash rate. To control the supply and demand within the market the RBA conducts Open Market Operations (OMO),

OMOs inject or withdraw cash from the market through changes in the supply of Exchange Settlements. The RBA can change the supply of cash by repurchasing or buying Exchange Settlements for bonds (basically an IOU with low interest) thus reducing the amount that can be exchanged between banks. The money market employs a standard supply and demand graph with the price being interest rates and supply as a vertical line, as the RBA sets quantity.OMOs occur every day with the RBA selling or purchasing bonds to ensure the amount of money is sufficient to meet demand at the required cash rate. Note: OMOs do not change the cash rate but instead maintain the one that has been already set by the RBA

How is the cash rate set? Well, this occurs through the somewhat complicated process of the interest rate corridor. The RBA itself can also borrow and deposit money from the banks outside of OMOs their deposit rate however is slightly lower than the wanted cash rate and lending rate slightly higher than the wanted cash rate. Banks have no incentive to borrow at a rate higher than the RBA and deposit at a rate and no incentive to deposit at a rate lower than the RBA. This ensures that the rate the banks lend and deposit converges on the wanted cash rate. The image from the RBA's website perfectly simulates a change in the cash rate.