Assignment-RBA influencing interst rates (1 Viewer)

[Loz_metalhead]

I really DO NOT like economics...im in year 11 and cant stand it.

I dont know how to do this assignment. It is a report and has to be 1200 words.

The Role of the Reserve Bank of Australia in influencing interest rates in Australia

The process the Reserve Bank uses to influence the cash rate of interest

The movement in the cash rate of interest over the last two years and reasons for these movements

The factors that are likely to affect the cash rate of interest in the future

 

[Rafy]

The role : Basically talk about how the government delegates monetary policy to the RBA. Also why it influences the rates (Internal/external stabilty/inflation) to carry oout part of the gov's macroeconomic objectives

The Process: The process of Market Operations and the sale/purchase of Commonwealth government securities in the short term money market.

Movement over the last 2 years: Search for the historical I.R chart; you'll find recent movements have being upward (although its being steady for much of this year) Reasons include the relative strength of the australian economy. (there are many more, look at news articles etc from past changes and youll find the reasons....i.e the strong E.R etc)

Future changes: The RBA's quaterly statement says that in the short term rates are on hold. ALthough, There may be some upward pressures from the rising world oil prices (which will have inflationary effects) Again do a bit of research and you'll find alot of opinions in the media....

I hope that helps with the general direction of the assignemnt and gives you some pointers of what you should include. Just do a bit of research; there is heaps of information out there!

(I could go into alot more detail, but yeh im not going to do your assignment for you ) Research research research!

Good luck!

Oh and if you really dont like economics you probally should consider dropping it. Its the kind of subject you should like if you want to do well......

 

[*Ya_So_CuTe*]

Follow this guideline

Role of the R.B.A in influencing interest rates= RBA acton behalf of the federal government to conduct monetary policy which inturn influences interest rates.

The process they use is known as DOMESTIC MARKET OPERATIONS. This is where the R.B.A sell/buy Commonwealth Government securities with banks to influence the level of holdings the banks have on the overnight exchange settlement accounts. ( u will need to look this up to understand how it works). The amount of money banks have in their exchange settlement accounts inturn effect the availability of cash on the short term momey market, which ultimately influence the cash rate.( NOTE : CASH RATE and INTEREST RATE are DIFFERENT things) E.G. If the government wanted to increase interest rates to dampen consumer spending to constrain economic growth to control inflation; they would sell securities to banks. The money the banks use to buy the securities comes from their exchange settlement accounts. This means that there will less money available for lending. HENCE: the cost of borrowing becomes more expensive as supply of money in the short-term money market decreases.

Movement in the cash rate: u need to research trends, look at pre-emptive monetary policy by the RBA

Factors effecting future cash rate. look at economics indicators such as growth, inflation, unemployment, external stability and links between them, If u can do that ur set!

ALSO: YEAR 11 ECONOMICS SUCKED! it gets A LOT better in year 12 when u can apply what u've learned to what's actually happening so it's less textbook based so ! GOOD LUCK

 

[Loz_metalhead]

Please... I want to start studying as my exams are in two weeks..so I want to get this finished as I know im going to go so bad in the exams. im so stressed

 

[Loz_metalhead]

Well I dont think I will get a good mark if I copy whats in the text book?

My rank for economics is 16/26

 

[Rafy]

Well I dont think I will get a good mark if I copy whats in the text book?

My rank for economics is 16/26

oh well 16/26 is okay...... Just study, and the concepts will soon make sense.

Dont just copy whats in the text book. Anybody can do that. You need to research current trends and issues surrounding the I.R (thats what the last 2 questions ask you to do) That stuff wont be in the text book....

 

[*Ya_So_CuTe*]

Please... I want to start studying as my exams are in two weeks..so I want to get this finished as I know im going to go so bad in the exams. im so stressed

Please...? Dude! we;ve given u ur outline, it's only 1200 workds which is like 2 and a bit pages and remember: IT'S ONLY YEAR 11!!! it would be better to experience bombing out these exams, getting a MASSIVE wakeup call and working more consistenly for year 12!

 

[Loz_metalhead]

Please...? Dude! we;ve given u ur outline, it's only 1200 workds which is like 2 and a bit pages and remember: IT'S ONLY YEAR 11!!! it would be better to experience bombing out these exams, getting a MASSIVE wakeup call and working more consistenly for year 12!

I posted the "please..." before I noticed there were replies. Thanks everyone. Its got 2 pages on market operations in the text book, I will put it into my own words.

 

[Loz_metalhead]

ok I finished the first part.

The process the Reserve Bank uses to influence the cash rate of interest

The process the Reserve Bank of Australia uses to influence the cash rate of interest is called Domestic Market Operations (DMO) and is the instrument of government monetary policy.

DMO is the purchase and sale of second hand government securities by the Reserve Bank. The RBA's domestic market operations determine the aggregate supply of Exchange Settlement (ES) funds and are designed to ensure that supply equals demand at the target cash rate. If the supply is too high, holders of ES funds will wish to lend their excess funds in the overnight market, putting downward pressure on the cash rate. If the supply is too low, they will wish to borrow, putting upward pressure on the rate. When the supply of funds held in the official short term money market increases, the price of borrowing this money, which is the cash rate, falls.

The Board of the Reserve Bank determines the target cash rate at its monthly meeting and any changes in the rate are announced at 9.30am, typically on the day after the Board meeting. The RBA's open market operations are designed to ensure that the actual cash rate remains close to the target rate.

The RBA cash rate influences the general level of interest rates. An increase in the cash rate means it’s more expensive for financial institutions to obtain funds in the short term market, and increases interest rates. A reduction in the cash rate lowers the cost of borrowing for banks in the short term market, and then financial institutions lower lending interest rates.

The RBA has direct control over the supply of funds in the over night money market. When the RBA sells government securities to banks, there is a shortage of borrowable funds with leads to an increase in the cash rate. To maintain margins banks increase market interest rates and consumers and business have to pay more on existing debts. Consumption and investment spending decreases, leading to a decrease in economic activity. This is the tightening of the monetary policy.

When the RBA buys government securities there is an excess of borrowable funds, therefore the cash rate decreases. To maintain margins banks decrease market interest rates and consumers and business have to pay less on existing debts or new borrowers find it easier to borrow funds. Consumption and investment spending increase because of the lower interest rates and economic activity increases because of higher consumer spending. This is the loosening of the monetary policy.

 

[sunjet]

Firstly, drop economics if you hate it.
Secondly, put graphs of the supply of funds showing tightening and loosening monetary policy.

 

[Loz_metalhead]

Where can I get that graph...I cant find in on the rba site...im going to do the 2nd and 3rd question...they seem really hard

 

[Loz_metalhead]

heres the last question I dont think its right. Im really stuck on the 2nd question.

The factors that are likely to affect the cash rate of interest in the future

There are many factors are likely to affect the direction of the cash rate in the future and they are:

Demand for capital goods (Investment)
Increased demand for investment funds will usually increase the rate of interest because it leads to higher demand for borrowing by firms to finance their capital expansion, which puts upward pressure on the level of interest. The increase in the rate of interest can also result from increased wages making capital cheaper and increased economic activity resulting from high demand.

Level of Savings
When there is a higher level of savings it leads to an increase in the supply of funds available for loans. This should put downward pressure on the rate of interest therefore decreasing the rate of interest. As the tax brackets have been increased and lower rates of income tax are being paid, this allows consumers to save more money.

The expected rate of Inflation
The level of interest rates encourage savings and in times when inflationary expectations are high lenders expect interest rates to increase because the value of money will be reduced and the high interest rates will be paid in compensation.

Domestic Market Operations
The main influence on the cash rate of interest is domestic market operations conducted by the Reserve Bank of Australia and is achieved through the buying and selling of government securities. The RBA influences the interest rates depending on many reasons including inflation-increasing interest rates if inflation is high and the Australian dollar-if the value is falling increase rates may be increased.

International Influences
The level of world interest rates can have a significant impact on domestic interest rates because funds can move across national borders quite easily. If the interest rate was lower than overseas, domestic lenders would try to invest funds overseas, which reduces the supply of funds to be loaned domestically and increasing the overall interest rate. Australia usually tends to maintain higher rates of interest compared to other countries to attract investment funds into Australia so there is an increased demand for the Australian dollar and its value will therefore increase.

 

[Rafy]

Try and mention the Upward pressure on rates due to the massive increases in the World Oil price recently. It is one of THE most important factors facing the international economic outlook currently (and therefore I.R)


Also you mention DMO in the Last question. It probally more pertains to the actual economic conditions/indicators that would cause the RBA to use DMO. (And DMO is addressed in an earlier question)

Here is a cash rate graph for you.

 

[Loz_metalhead]

Thanks for the diagram...I really dont know what to do for the second question...