Need Help: Cash Rate, ESA etc etc (confused) (1 Viewer)

[ipod21]

Well at school, we just got passed this section of the course. But i am still really confused about the whole process.

Can someone (who wants to) kindly explain this whole thing to me? Including the keywords and definitions, the process etc etc in a manner that i can understand?

We are using the Tim Riley book, which i find confusing at times :S

thanks

 

[Jerruy]

u need to be a bit more specific mate

 

[ilovecommunism]

回复: Re: Need Help: Cash Rate, ESA etc etc (confused)

well... according to my own memory, cash rates are adjusted by the RBA
it's like a kind of norm or standard for banks to set their own interest rates......

 

[kokodamonkey]

Re: 回复: Re: Need Help: Cash Rate, ESA etc etc (confused)

monetary policy refers to actions by the rba to manipulate the availability of credit within the economy. Interest rates = cost of money.

I dont remember how much we did in yr11, so i'll just give a brief explanation of things work. preety much there is a target inflation band. this is of 2-3% inflation over the period of a year. Now lets say inflation is getting towards the top end of the 2-3%, or has even gone over 3%.

To combat this the RBA will RAISE the CASH Rate. What this does is force interest rates up (i'll get to that shortly) and thus means money costs more/more expensive to borrow (as interest rates are the cost of money) and therefore dampen consumer spending and lower economic growth.

How the rba RAISES/influences interest rates.

The RBA does this by conducting DMO (Domestic Money Operations) in the STMM (Short Term Money Market)
the STMM is for the overnight settlement funds accounts between banks. (if Mr. A is with CBA and Mr. B with NAB, and Mr. A gives mr. B a cheque and mr.B Banks it, NAB has to demand the money from CBA)

SO the banks have a certaint amount of money they hold in these accounts in order to facilitate those transactions at the end of each day. and the rba has an account there too. So to RAISE rates, the RBA SELLS CGS + REPO Agreements (Commonwealth Government Securities with Repurchase agreements). As they SELL Them, that means the banks buy them, which means the banks have to hand over money to the rba, which they kept hidden in their closet (with tom cruise). So this then means that there is LESS MONEY available in the STMM to settle these overnight settlement accounts.

So this forces the cash rate up in the STMM (banks lend excess funds to each other etc to cover their balances).

This will then force interest rates up (banks voluntary raise their rates, the rba doesnt not control interest rates, this is confusing but an important clarification) in order to maintain profit margins.

And same goes vice versa for lowering Rates in order to stimulate growth. i hope what i said makes sense, is correct and is what you wanted!