Official Cash Rate is the interest rate paid by bank to settle the interbank transfers which is done overnight and is regulated by the central bank. (Petro  Tripe, 2004) Where as Market rate of interest is the interest rate charged by commercial banks when it lends money to the public and is dependent on the demand and supply of money. (Petro  Tripe, 2004) The difference between the two is official cash rate is affected only by the transfer between the central bank and institution where as market rate is between the commercial banks and customers who borrow or deposit. (Petro  Tripe, 2004) The official cash rate doesnt affect the money supply in the system where as an increase or decrease in market rate affects the money supply. (Petro  Tripe, 2004)
The RBA uses monetary policy to manage the cash rate. The rate is determined by the RBA board and is announced in the meetings. (Scilly, 2009) Here they engage in open market operation. This is done through two ways. To raise the rate the following ways are used
Adjusting the price of short term finance RBA adjusts the short term finance making them costly. Commercial banks have to park more funds with Reserve bank. This results in less money to be lent to public. As a result interest rate rises. This is a policy used in short run.
Buying securities in the market This result in interest rate to rise. Here the RBA buys securities which results in banks having less amount to lend, as a result banks have less cash in their settlement accounts resulting in cash rate to increase. (Scilly, 2009) This policy thus helps to reduce money. It causes interest rate to rise. It is shown in the diagram below

Figure  SEQ Figure  ARABIC 1 Increase in Cash Rate
So, we see above how interest rate increases. Here the demand is kept the same. Though, in real life it also changes but the rate increases much more. It shows how the policy is used by RBA to control the economy.
Increase in interest rates affects pattern. When interest rate increases, the increased cost of borrowing tends to reduce capital investment and, as a result, total aggregate demand decreases. (Nicholson, 2008) The increases in interest rates make borrowing costly. This brings down consumption resulting in reduced production. Finally, it is seen that increasing rate of interest tends to pull both consumption and investment down thereby affecting the entire demand. (Nicholson, 2008) This is shown in the diagram below

It shows that increase in interest rates decreases money demanded. This is because borrowing becomes costly. This pulls down supply and the chain continues till equilibrium is reached. It ends when the demand matches supply. This happens but after consumption and investment has fallen. Thus it results in contraction. A look at the demand and supply shows as follows

Here we see that interest rate affects demand. An increase in interest causes aggregate demand to move down. It is seen by demand 1 line. The supply remains the same. This causes output to fall as a result prices also move downward. (Nicholson, 2008) Thus, we see that the demand shifts down showing how a rise in interest affects the demand pattern.
The rise in interest rate also affects inflation and employment. An increase in rate causes more unemployment as companies reduce their production because people consume less which gets translated into more people losing their job. (Nicholson, 2008) This also has an effect on inflation. With fewer goods being produced things become expensive. But as demand is low prices come down. These result in bringing down inflation rate. It is also seen that inflation and employment move in opposite direction which is also the case here. (Nicholson, 2008)
Credit creation is a process by which banks create money in the economy by lending money to the public out of the primary deposits. (Joseph, 2007) It is one of the activity banks pursue. Banks lend money to the public only after the requirements to comply by the law has been met.
The credit creation by commercial banks gets affected by monetary policy. The situation depends on the type of policy used. It affects credit creation in the following ways
Open Market Operation RBA is using contraction measures here. RBA is selling bonds and securities which have resulted in less money with the commercial bank to be lent to the public as they have less money and mostly all the sum is invested in bonds and government securities. (Joseph, 2007)
Reserve Requirement RBA has raised the reserve requirement for banks. Reserve requirement is the amount of money commercial banks have to keep with reserve bank or central bank and is calculated on the amount of time and demand deposits. (Joseph, 2007) Commercial banks have less money to lend as the requirements have been raised. This is a contraction method which is used and has affected the lending capability.
 Discount Window RBA has raised this rate for banks. It is the amount commercial bank has to pay as interest to the central bank for the sum borrowed from them. (Joseph, 2007) Increasing this rate has made it expensive for banks to take loan from reserve bank. Commercial banks are finding it tough to manage it. The cost of borrowing is high for commercial bank and the interest they receive from customers is not sufficient to manage it. (Joseph, 2007) Here also contraction measures are used by RBA.
RBA should follow the contraction measure. It will help them come out of recession. Demand is falling so raising interest rate will create an impression that economy is growing. The morale of the people will improve as they will see the situation improving. This will make people spend more money. As a result of this production will increase and so will employment This chain will continue till the economy revives. Thus these measures will help RBA and is under their control.