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Australia Monetary Policy Essay

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Monetary policy definition
Monetary policy is the macroeconomic procedure set around the central bank. In Australia, Reserve Bank of Australia (RBA) is responsible for preparing and implementing Australia monetary policy. Monetary policy includes administration of cash supply and interest rate on overnight loans in the money market (‘the cash rate’). The cash rate impacts other interest rates in the economy, influencing the conduct of borrowers and moneylenders, financial movement and the inflation rate.
The Bank has an obligation to manage stability of the currency, the prosperity of economic, manage full employment and welfare of the Australian individuals. In order to attain these medium term statutory objectives, the central bank has an inflation target at 2-3% to maintain consumer price inflation. The inflation …show more content…

Increase in interest rate increase the cost of borrowing to fund expenditure. The increase encourages individuals to save, hence defer spending and they reduce the net returns on investment. On personal level, high mortgage rate could discourage individuals from buying house or an asset or to lessen the sum that they can spend on a house. High interest rate could encourage individuals to save, because they can earn more interest income by putting aside some of their earnings as savings. On the other hand, low mortgage rate encourages house purchases. These will impact on widely to different part of economy. Changes in the quantity of houses being built have influences on the demand of building materials, household goods and employment in real estate industry. On business level, changes of interest rate have a direct impact on business activity. When the finance cost is high, it will cause a firm to postpone building a new plant that would provide more returns if it were on lower rate. In other words, it will be more profitable for a firm if the cost of borrowing is lower and more investment project will be

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