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Capital - Essay Example

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Capital

The prices of the Australian goods exports have decreased since May, due to the decrease in the price of crude oil, iron ore, etc. The Australian dollar price has appreciated over three months, despite the deterioration in the global economy and fragile financial condition. This study aims at evaluating the decision of Reserve Bank of Australia (RBA) for not changing the cash rate until December. The implications of cash rate in the economy of Australia, its effect and the effect of probable changes in the cash rate are also important issues that would be discussed in the study. The motive is to forecast the decision of RBA regarding changing the cash rate. Like the central banks in the industrialized countries, the RBA also utilizes interest rate on short-term basis, as an operating instrument in order to implement monetary policy. Under the current policy, the RBA has set a monetary policy by allotting a level of target for cash rate. RBA has been quite successful in achieving the cash rate as per its target level. The payment system of an economy represents the system by which the different agents settle their transactions. In case of Australia the major participants that can be considered in the payment system are the households or the firms, which can also be called the non-bank mass of public, the RBA, private banks and the federal government. The non-bank public use transaction deposits and currency for making payments and eliminating their debts if any. The transaction deposits are the banks accounts that can be used by cheques or through the debit cards. Money or currency is a liability for the RBA. So it can be said that the transaction deposits are also a liability for the banking system. It can be also said that the medium of transaction by a household or firm would also depend on the relative cost. The banks transact with the firms or households either through currency or through the transaction accounts. In such cases complications arise when the banks had to enter into transaction with each other and also with the federal government. Since settlement of debt through physical means would be quite expensive, so this problem is solved through the usage of clearing system. The process of clearing the debts among the banks through the accounts that the banks have with RBA is known as exchange settlement (ES). Now we would understand the cash market and the channel of cash rate, only then we would be able to understand why the RBA did not change the cash rate. The operations and functions of the cash market need to be understood before understanding the present market scenario. The interbank or cash market is nothing but the market where the banks can borrow and also lend money for short period of time. One of the most significant functions that the cash market serves is that it provides a platform to the individual banks to trade their ES funds. The requirement of the RBA market is that, the ES accounts are available in credit and this would provide an opportunity for the cash market to provide means of redistributing the ES funds among the ES account holders. The banks which have a shortage of ES funds can borrow it from those banks which have ES funds above the required level (Reserve Bank of Australia, 2012a). The two major feature of the cash market ...Show more

Summary

Capital The global economic development has slowed down in the recent months in 2012. Anxiety regarding the banking and fiscal problems in the Euro segment is increasing the pressure on the global economy. The recent data suggests that the economic activities have contracted in Europe…
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Capital essay example
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