StudentShare
Contact Us
Sign In / Sign Up for FREE
Search
Go to advanced search...
Free

Factors Considered in Determining Interbank Interest Rates - Example

Cite this document
Summary
The paper "Factors Considered in Determining Interbank Interest Rates" is a great example of a report on macro and microeconomics. The report brings an analysis of an article that concern with cut rates by RBA. Policy instruments are defined as the available options that can be utilized by the government to run economic activities…
Download full paper File format: .doc, available for editing
GRAB THE BEST PAPER96.5% of users find it useful

Extract of sample "Factors Considered in Determining Interbank Interest Rates"

Economic report Name Institution Course Date Introduction The report brings an analysis of an article that concern with cut rates by RBA. Policy instruments are defined as the available options that can be utilized by the government to run economic activities. Instruments are classified as either monetary policy or fiscal policy. Fiscal policy refers to those actions undertaken by the government in relation to its level and composition of expenditure, borrowing and taxation with the main objectives being to spur economic growth, lower unemployment rate, manipulate growth and level of output and aggregate demand. Monetary policy refers to the actions pursued by the central bank of a country to regulate the amount of money supply in the economy. The actions can be either on interest rates or on exchange rates. The main objective is to check on the rate and level of expansion of AD (aggregate demand) in the nation. Specifically it is used to control the rate of inflation and unemployment rate. Monetary policy can classified as expansionary or contractionary policy. Therefore, a target is also referred to as an objective. It is the aim of any economic policy and it can be measured in reference to an economic variable like unemployment rate, growth of Gross Domestic Product (GDP), or rate of inflation. To achieve these targets we use policy instruments. A change in economic policy (instruments) used will led to a change on the other variable (the target). This indicates of the relationship existing among economic variables1. The expansionary monetary policy has a positive effect on the challenges that an economy is going through in a sub-prime crisis. The challenges include low growth rate and skyrocketing interest rates. The policy will reduce the interest rate which is a recipe for increased capital investment, hence an improvement in economic growth. The use of discretionary monetary policy is suitable for the reserve bank of Australia in control of the prevailing economic crisis. The result of a sub-prime crisis is ballooning inflation rates; the households find it difficult to meet their daily needs. To reduce the high inflation rates, which are closely related with the deficiencies within the financial sector, is to adopt monetary policies that are geared towards reducing the interest rates and stability of commodity prices. Factors considered in determining interbank interest rates The main objective of Australian government is to boost economic growth. Therefore, the country policy makers will have to adopt a growth targeting monetary policy. Under this monetary policy, the target is to improve economic performance. The growth target can only be attained through the central bank periodical adjustment on the interest rate target. The economy will adopt an expansionary monetary policy where the amount of money supplied in the economy is increased through interest rates cut leading to growth and increased investment. The changes made on the interest rate target occur in response to a number of market indicators in an effort to foretell economic patterns. This will ensure that the key objective of an economic growth target is achieved. When cash rate is lower than the expected, the commercial banks are likely to increase interest rates. This is an expansionary policy since it will ensure a just economy and a low interest rate. The other factor used by RBA to determine interbank interest rate is economic performance. Australia’s economy is recorded as one of the strongest and fast growing economy in the world. In the last decade, the economy has recorded a fall in unemployment and economic growth. With the economy, engaging in vigorous policy and structural reforms the economy has turn out to be resilient, flexible and well integrated with worldwide markets. In the recent years the economy has be able to overcome both internal and external milestones such as a housing boom, major drought and the economic and financial crisis that had hardly hit the Asian community. The market forces determine interest rates and as such, the economy faces the risks of uncertainty because prices fluctuate on a daily basis. Therefore, it brings confusion among importers and exporters since they are not sure of the exact price. In addition, it may act as an impediment to investment, and the economy is at risk of lacking investment both internal and foreign investment. The other risk is that an economy is vulnerable to high inflation rates, and as a result, an economy will face adverse economic times. Furthermore, an economy will be exposed to the risks of speculation; this will destabilize and damage the economic performance of the country. An economy will also face the risks of mounting deficits in relation to balance of payment deficits. As such, the RBA use the prevailing conditions in the market in order to determine interbank interest rates. Reasons Given By Banks for Not Matching the Interest Rate Cuts The chief reason provided by Australian banks is profits protection. The commercial banks increased interest rates in order to protect profits. They maintain that during the global financial crisis commercial banks incurred high borrowing costs. Commercial find the interest rates charged on borrowers as appropriate since it cushion their profit. Australians banks faced high total funding costs because most of their funds are sourced from overseas. The competition among banks in Australia in seek of new borrowers, as well as the uncertainty of lending money during global economic crisis affects the funding costs of local banks. Uncertainty in the global environment is another reason given by local banks. Local banks in Australia still nurse the effects of the global financial crisis, and they fear a repeat of the same may adversely affect their operations. In addition, banks in the global market are still undergoing difficult times, and as such, it will make local banks overseas borrowing costs to increase. The basis of determining lending rates is also another reason for banks not to match their interest rates with those of RBA. Despite banks using that changes in RBA's cash rate as a basis for setting corporate borrowing rates, they also link the loans other money market rates and bond prices or fixed rates. As a result, customers on market rates benefit when the rates decline, even early than the move taken by RBA. Therefore, the move to pass on rates changes should not be blanket-like, but in relation to loans that are referenced to the reserve bank of Australia cash rate. Whenever there is a cut on interest rates, commercial banks should pass on the changes in rates to the public. The treasurer should ensure that rate cuts are passed to the public in full. This is because local banks should be forced to adhere to new changes, otherwise consumers may not benefit from interest rate changes. On the contrary, when interest rates are increased by RBA, commercial banks pass on the increase in full to consumers, but when the rates are lowered borrowing costs for banks is not affect because they source more than one-thirds of their lending money from overseas2. When the rates of interests declines, the businesses will have an incentive to borrow money to expand their businesses unlike when the interest rates are high. This is because the amount of interest attracted by the principal amount will be very low hence cannot squeeze the business of its profit. Normally the decrease in interest rates is caused by an increase in government spending which we said earlier it’s a recipe for high investment in a particular sector. It is important to note that when the government spending decreases, the interest rates will be high. This to a greater percentage will discourage businesses from borrowing money. The multiplier effect will be minimal because the amplified incomes are less. This means that the amounts of money in circulation will reduce hence no extra money to be invested. This affects the entire economy in a big way. The various stakeholders have to be very careful when dealing with such situations. It will be hard for businesses to find additional money to expand their venture. In the entire economy, everything will be tight because the aggregate demands also will drops. This indicates that the amount of goods demanded is minimal beyond the expectations and the normal level in the economy. This is an impediment to the development of industries. When the purchasing power of consumers is down the investors will tend to limit extend of their investment or even decline to invest at all. Conclusion The use of interest rate cuts as a monetary policy by RBA is the best action in ensuring economic growth and increased investment. However, the move cannot achieve its intended objective because of interest disparity between RBA and local banks. Banks fail to pass on the change in interest rates to consumers. It is essential for the economy to use other actions such as political reforms in order to achieve the intended objective of economic growth and increased investment. In addition, it will increase consumer confidence because of minimal uncertainties. Commercial banks should match their lending rates with cash rate in order to protect consumers from high cost of borrowing and living. Bibliography Staff reporter. RBA cash rate cut ups pressure on banks. Retrieved from http://www.businessspectator.com.au/bs.nsf/Article/RBA-cuts-cash-rate-by-05-bps- pd20120501-TV6XG?OpenDocument&src=tnb Read More
Cite this document
  • APA
  • MLA
  • CHICAGO
(Factors Considered in Determining Interbank Interest Rates Report Example | Topics and Well Written Essays - 1500 words, n.d.)
Factors Considered in Determining Interbank Interest Rates Report Example | Topics and Well Written Essays - 1500 words. https://studentshare.org/macro-microeconomics/2037210-economics-report-writing
(Factors Considered in Determining Interbank Interest Rates Report Example | Topics and Well Written Essays - 1500 Words)
Factors Considered in Determining Interbank Interest Rates Report Example | Topics and Well Written Essays - 1500 Words. https://studentshare.org/macro-microeconomics/2037210-economics-report-writing.
“Factors Considered in Determining Interbank Interest Rates Report Example | Topics and Well Written Essays - 1500 Words”. https://studentshare.org/macro-microeconomics/2037210-economics-report-writing.
  • Cited: 0 times

CHECK THESE SAMPLES OF Factors Considered in Determining Interbank Interest Rates

Returns from Bonds and How Change in Interest Rates Affects Them

… The paper "Returns from Bonds and How Change in interest rates Affects Them " is a good example of a macro & microeconomics essay.... The paper "Returns from Bonds and How Change in interest rates Affects Them " is a good example of a macro & microeconomics essay.... One of the key indicators of the direction bond prices will take is the interest rates, thus the keenness with which players in the market observe it.... nbsp;Investors go to the bond market with the intention of making money and it is important for them to have a way of determining how much they are likely to make from that investment....
8 Pages (2000 words) Essay

Investment and Interest Rate

Investment appraisal is effectively achieved using the net present value and internal rates of return approaches.... Investment appraisal is effectively achieved using the net present value and internal rates of return approaches.... Given the fact that the discount rates are constant, the first investment is more viable as opposed to the second investment.... … The paper "Investment and interest Rate" is a perfect example of a finance and accounting assignment....
8 Pages (2000 words) Assignment

Stock Market Development and Economic Growth

Stock prices are bound to go down with an increase in interest rates.... Investors will normally lookout for fluctuations on interest rates as it can give either good or bad information and this is normally caused by the actions of monetary bodies (Lobo, 2000).... The relationship between stock prices and exchange rates is therefore a negative one.... Among the most important macroeconomic variables, in this case, are interest rate, inflation, and exchange rate....
14 Pages (3500 words) Research Paper

Bond Yield, Interest Rates and Bond Prices

… The paper 'Bond Yield, interest rates and Bond Prices" is a good example of finance and accounting coursework.... The paper 'Bond Yield, interest rates and Bond Prices" is a good example of finance and accounting coursework.... Both the call yield and yield sinker may not be pertinent in circumstances when interest rates have increased since the first time bond as issued due to the fact that bonds will be selling for less than the par value in the secondary market and help in support bonds prices for the holder of the bond (Greenwood & Vayanos, 2014)....
2 Pages (500 words) Coursework

Managing of Interest Rate Risk

… The paper "Managing of interest Rate Risk" is a great example of a finance and accounting essay.... interest rate risk can be defined as the risk that is found within assets that are interest-bearing such as a bond or a loan, as a result of the probability of change that can occur in the asset value due to the variability of interest rate (Jonathan2007).... The paper "Managing of interest Rate Risk" is a great example of a finance and accounting essay....
8 Pages (2000 words) Essay

Money Market Interest Rates in Australia and New Zealand

… The paper "Money Market interest rates in Australia and New Zealand" is a good example of a micro and macroeconomic case study.... The paper "Money Market interest rates in Australia and New Zealand" is a good example of a micro and macroeconomic case study.... Reserve banks can also influence the interest rates of the money supply.... This may be achieved through interest rates regulation where the reserve banks in these countries raise lending rates to commercial banks and consequently it becomes difficult for borrowers to access funds through commercial banks due to high-interest rates....
8 Pages (2000 words) Case Study

IKEA's Development - Mission, Vision and Strategic Objectives, Environmental, SWOT and Competitor Analysis

… The paper “IKEA's Development - Mission, Vision and Strategic Objectives, Environmental, SWOT  and Competitor Analysis” is an excellent option for a case study on marketing.... IKEA is a multinational corporation that mainly specializes in the production and sale of furniture....
34 Pages (8500 words) Case Study

Fiscal Policy and Consumption with Credit Constrained Consumers

C1 = + MPC = The equation shows that the marginal propensity to consume is greater than zero and there is an interest rate factor in the utility function.... This means when there is change in income, there is exact change in interest rate.... … The paper “Generalised q-Theory of Investment, Fiscal Policy and Consumption with Credit-Constrained Consumers” is a forceful variant of the assignment on macro & microeconomics....
8 Pages (2000 words) Assignment
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.
Contact Us