Loanable Funds Market In Australia

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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.

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