1. Introduction:
The Reserve Bank of Australia is considering an increase in the target cash rate by 25 basis points in the near future. It is the intention of this report to analyse the positive and negative impacts of a rise in interest rates on the loanable fund market in Australia.
In order to analyse the impacts of an increase in interest rates on the loanable fund market, the reasons behind the possible rate rise in the near future will be looked upon.
Charts and diagrams have been used to illustrate the intention of this report and it is hoped that by looking at these vital elements the intended user will be able to understand the issue more thoroughly and follow the analysis behind it and get a clear understanding of the issue.
2. Cash Rates of the Reserve Bank of Australia(RBA):
The Reserve Bank’s monetary policy actions are directed towards influencing the level of interest rates in the financial system on order to achieve its economic objectives (Viney, 2005).
Cash rates are the interest rate paid in the interbank market for exchange settlement account funds. The target cash rate can only be set by the Reserve bank, it is decided monthly when the board of the Reserve Bank (RBA) meets and considers various financial indicators from around the world and target inflation rate. The main purpose of the cash rate is to control inflation.
Kruger & Coorey (2007), state that The Reserve Bank has announced a 0.25 percentage point increase in interest rates this morning to 6.5 per cent. This increase has an influence on output, employment and prices through a number of complex, related channels which affect the cost and availability of funds to the business and household sectors.
Source: Sydney Morning ...
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... interest rates might be beneficial for the Australian economy but if the interest rate keeps rising, it would hamper the loanable funds market as no one will be interested in taking loans from the bank over a high rate of interest.
7. Recommendations: The Reserve Bank increases and decreases interest rates in order to control inflation. RBA should be careful when it increases the interest rates as if it increases it by a lot, it will result in an inflation causing everything to be expensive which will negatively affect the economy.
At the same time when the RBA decreases the interest rates, it should be careful by not decreasing it a lot as then the RBA would lose out on its income. If the RBA increases or decreases the interest rates by 0.25% to 0.40% per year it will be beneficial for the companies as well as for the economy and the funds market in Australia.
Monetary Policy is another policy used in Keynesianism which is a list of protocols designed to regulate the economy by setting the amount of money that is in circulation and controlled interest levels. The Federal Reserve system, also known as the central banking system in the U.S., which holds control of this policy. Monetary policy has three tools used by the Federal Reserve to enforce this policy. Reserve Requirement is the first tool that determines the lowest amount of money a bank must possess and is not able to lend out. The second way to enforce monetary policy is by using the discount rate or the interest rate a bank will charge.
The Federal Reserve and Macroeconomic Factors Introduction The Federal Reserve controls the economy of the United States through a variety of tools. They use these tools to shape the monetary policy of the United States in order to promote economic growth and reduce the rate of inflation and the unemployment rate. By adjusting these tools, the Fed is able to control the amount of money in the supply. By controlling the amount of money, the Fed can affect the macro-economic indicators and steer the economy away from runaway inflation or a recession.
Reserve Bank of Australia (2010). Minutes of the monetary policy meeting of the board – 3 August 2010. Retrieved August 20, 2010, from http://www.rba.gov.au/monetary-policy/rba-board-minutes/2010/03082010.html.
Even though most of us may not realized it, interest rate actually play an important role in our everyday lives due to its great effect on the buying power. For instances, if the interest rate is higher, people tend to reduce their spending and rather save it in the deposit account due to the large interest that they can gained. However, if the interest rate is lower, they rather spend it than keeping it in the deposit account. The reason for this is because the ups and down of the interest rates have a significant impact on their personal income. Furthermore, since interest rate have a major impact on investment it is important for the investors to keep track on these interest rate’s trend before making any decision.
In the study of macroeconomics there are several sub factors that affect the economy either favorably or adversely. One dynamic of macroeconomics is monetary policy. Monetary policy consists of deliberate changes in the money supply to influence interest rates and thus the level of spending in the economy. “The goal of a monetary policy is to achieve and maintain price level stability, full employment and economic growth.” (McConnell & Brue, 2004).
Australia has had one of the most outstanding economies of the world in recent years - competitive, open and vibrant. The nation’s high economic performance stems from effective economic management and ongoing structural reform. Australia has a competitive and dynamic private sector and a skilled, flexible workforce. It also has a comprehensive economic policy framework in place. The economy is globally competitive and remains an attractive destination for investment. Australia has a sound, stable and modern institutional structure that provides certainty to businesses. For long time, Australia is a stable democratic country with strong growth, low inflation and low interest rate.(Ning)
It’s mandatory for all the banks to deposit a certain determined percentage of their assets with the central bank to make sure that the banks’ customer deposits are safe. These percentages are what the central bank adjusts to reduce or increase the banking lending ...
Ross, S.A., Westerfield, R.W., Jaffe, J. and Jordan, B.D., 2008. Modern Financial Management: International Student Edition. 8th Edition. New York: McGraw-Hill Companies.
According to data on trading economics, the budget deficit in Australia happened since 2008. Pash (2016) stated that Australia deficit currently is sitting on 41.7 billion dollars, 4.3 billion dollars higher than expectation. It will be estimated that Australia deficit will reach almost $ 129 billion in 2018/2019. An increase in budget deficit leads to the raise in Australian debt that affect Australian economy to be under threat. Australian debt recently is A$ 400.89 billion, increases significantly for about 32.16 billion dollar from 2015. Janda (2016) reported that Australia is the biggest AAA country since 2009 that has the highest increasing debt. An increased debt affect to the decline in the Australian economic reputation. As Janda (2016) points out, Australian sovereign rating decline one point downgrade from AAA to AA+. The deteriorates of the Australian economic reputation influence the investor confidence. As the time went by, the Australian economic growth will decline because there is no revenue to be gained from the investor. In consequence, the only possible method to pay the debt is raising tax for future generation. According to Wood and Daley (2014), an increase in $40 billion deficit will affect to tax burden $10.000 for
This article is also a good example of how the aggregate demand curve can be shifted by the determinant of monetary policy. Please refer again back to article #4, which explains the principle of the aggregate demand curve. By definition, Monetary Policy is a policy influencing the economy through changes in the banking system’s reserves that influence the money supply and credit availability in the economy. The purpose of monetary policy is to improve the economy by either increasing or decreasing the real income (or GDP) of the U.S. economy so that the economy is running at its potential. The Federal Reserve (The Fed) is responsible for conducting monetary policy for the United States Economy. There are three ways that the Fed conducts monetary policy: 1) Changing the reserve requirement. 2) Executing open market operations (buying and selling bonds). 3) Changing the discount rate.
Discount Rate, it is in fact, the interest rate charged to commercial banks and other depository institutions on loans they receive from their regional Federal Reserve Bank 's lending facility, (Board of Governors Federal Reserve System, n d). The financial institutions must borrow funds at this interest to the Federal Reserve System. Fed use this tool to control the supply of money something that will affect the inflation and the overall interest rates.
Interest rates and the effects of interest rates on the economy concern not only macroeconomists but consumers, savers, borrowers, and lenders. A country may react and change their interest rates, according to the prosperity of their economy. Interest rates, is the percentage usually on an annual basis that is paid by the borrower to the lender for a loan of money (Merriam-Webster). If banks decided not to use interest rates, it would be impossible for others to be able to take out loans and therefore, there would be far less spending money in the economy. With interest rates, this allows banks to take a percentage of the consumer’s money and loan it out to others, thus allowing economic growth to be possible. Interest rates also allow lenders to have a “safety net” which is necessary because there is a possibility that the borrower would be unable to pay back a loan to the bank. A nation’s interest rates can be raised or lowered and these shifts in interest rates correlate directly to aggregate demand. Aggregate demand, is the total demand for final goods and services in an economy at a given time (Business Dictionary). A nation uses interest rates for economic growth or to help prevent inflation. When economic growth is needed a nation would lower their interest rates. However, if a country is concerned about inflation, they may choose to raise their interest rates. When interest rates, raised or lowered, will have a negative or positive impact on consumers, and have a positive or negative impact on investors.
Monetary Policy involves using interest rates or changes to money supply to influence the levels of consumer spending and Aggregate Demand.
Financial Future: Where Will it be in 10 Years? Retrieved on November 20, 2013 from
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