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How Does The Reserve Bank Of Australia Affect The Money Market?

1348 Words6 Pages

A crucial part of the financial market in Australia is the money market, which is the market for borrowable funds. The price in the money market is the rate of interest. These prices in the money market are not only achieved through equilibrium of market forces alone, but by the intervention of the Reserve Bank of Australia (RBA) playing a vital indirect role in setting cash rates which impacts the interest rates. The RBA’s influence on interest rates is to affect the level of economic activity, and this is known as monetary policy. The RBA uses monetary policy to affect money supply in the economy in order to help achieve economic objectives of low inflation and sustainable growth. The RBA implements the monetary policy in the economy through …show more content…

At the end of every day, banks settle their payments with other banks by borrowing or lending money if they have shortage or excess of funds in their ES accounts. When the supply of funds held in the short-term money market is too high, the price of borrowing this money, the cash rate of interest, falls. However, if the supply of funds in the market decreases, the cash rate will rise. The RBA cannot control the demand and supply of settlement funds through open market operations, so the RBA will intervene to either increase or decrease the cash rate by purchasing or selling securities. To increase the cash rate, the RBA will sell its securities to banks, and this will cause a reduction in the ES accounts. This reduction of money supply will force dealers to borrow money from other banks to meet their obligations. Because they have a decrease in the supply of settlement funds, they will increase the interest rates to entice more funds. On the other hand, if the RBA wants to reduce the cash rate, it will buy securities from banks, and in exchange add additional funds in their ES accounts. The increases of supply of settlement funds, causes the cash rate to fall. In relation to the current monetary policy in Australia, the RBA is controlling the economic stagnation by implementing the loosening monetary policy. The expansionary stance of monetary policy has assisted Australia by, stimulating economic activity slowly by reducing the rate of unemployment in Australia and increasing the rate of inflation to reach the monetary policy’s target of 2-3%. To ease monetary policy, the RBA would announce that it will lower the cash rate at the beginning of the trading day in the cash market. The RBA would buy Commonwealth Government Securities (CGS) from banks and other institutions in the cash market. This increases the supply of cash and this

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