- The role of the RBA - (1 Viewer)

[lilkiwicutie89]

hi
i cant find much information about the RBA in determining the cash rates ( market operations )

would you guys now how they determine it ? yeah casue i was reading it and apparently its something to do with the monetary policy? but im still not sure about it .. yeahh we have to give a powepoint presentation.

thanks a lot

lilkiwicutie89

 

[Rafy]

The central bank (Rba in AUstralia) carries out monetary policy on behalf of the government. One of its functions is to iinfluence the cash rate through Domestic Market operations (DMO) (also known as Open market operations).

They do this by affecting the level of money supply within the economy. When supply is reduced, rates go up, when supply is increased rates go down.

Now every financial institutaion is required to hold an Exchange settlement account (ES) with the RBA. This account is used by the account holders to meet their settlement obligations to each other and to the RBA.

The RBA's dmos determine the aggregate supply of ES funds and are designed to ensure that supply equals demand at the target cash rate

To affect the supply the RBA trade in second hand government securities. (as the rba is the banker to the government). The sale and purchase of these influences the amounts in the fin. institutions ES accounts.

A sale of securities by the RBA would mean a reduction of funds in ESAs which would force dealers to borrow on the short-term money market to meet their obligations. As they are short of funds they increase their rates to entice more funds. The opposite applies for the buying of securities by the rba

The change in overnight rates filters through to the long term ones as banks are not prepared to lend money for 90 days at less the rate they can get overnight.


Im not sure you understood that ramble, any questions just ask

 

[Will Hunting]

Hey lilkiwi,

Yeah, don't worry at all about this stuff! DMO is something I'm sure you'll latch onto real quick, and, noticing you're all the way back in year 11, the pressure should be that much milder Relax and enjoy it. It's actually heaps fluid and gets covered again in Year 12 so you don't need to fuss too much straight up!

i cant find much information about the RBA in determining the cash rates ( market operations )

Yeah, no worries there. I'll just punch in a few page references for you.

- Pg. 192-3 - "The Market Economy" (Tim Dixon/ John O'Mahony)

- Pg. 262-4 - "Australia in the Global Economy" (Similarly)

- Pg. 181-2 - "Year 11 Economics" (Tim Riley)

Note that the second one here's a reference to a Year 12 text, one which you may or may not have on hand. You may want to hold off on this one simply due to its being a resource you shouldn't be expected to draw upon, since it lies beyond the scope of the Preliminary course (technically, not content-wise), but also because, although providing a solid account on this particular policy instrument, it is vexatiously iterative overkill. You should find you'll be able to get more than enough out of the other two Preliminary texts I've mentioned.

The central bank (Rba in AUstralia) carries out monetary policy on behalf of the government

lilkiwi, it's important to note that although the RBA conducts its operations on the government's behalf, it is, in its own right, an independent authority managed by a non-partisan board of directors. This status helps to protect RBA decision-making from distortion by political pressures. By the same token, however, the RBA can be classified a Commonwealth institution insofar as no economic actors from the private sector hold direct stake in it (the private sector rarely transacts directly with the RBA) and also because it is wholly accountable to parliament and any jurisdiction thereof.

Now every financial institutaion is required to hold an Exchange settlement account (ES) with the RBA

This is not true. Only banks have ES accounts. Though the RBA does not deny other financial institutions attention provided they are members of the Reserve Bank Information and Transfer System, it is typically only banks whose transactions are settled through ESAs. Think of non-bank financial intermediaries. In the case of these organisations, settlement involves mere shuffling of funds between borrowers and lenders of cash, independent of RBA intervention. See the following page:

http://www.rba.gov.au/DomesticMarketOperations/Publications/implementation_of_monetary_policy.html

A sale of securities by the RBA would mean a reduction of funds in ESAs which would force dealers to borrow on the short-term money market to meet their obligations

This is not necessarily true, and, besides, is far from the rationale of DMO. The repurchase agreements made by the RBA serve, principally, to exert influence over the overnight cash rate in the short run money market. The chief role this plays is to reflect the changes in liquidity that have taken place, in the ESAs, due to the involvement of the RBA in this market, and, by no means, would force any participating institutions into debt, as you have said. You have to realise that monetary policy is a response to, and not a cause of the relative differentials between holdings of funds in different institutions. A "dealer" could incur a deficiency of funds for any number of reasons, including through purchase of currency notes from the RBA or any other form of transaction shifting supply of funds in the market for settlement accounts. It need not be a product of the sale of CGS.

As they are short of funds they increase their rates to entice more funds

Ah, no dude. The shortage of funds occurs in the market for settlement accounts, not in the banks themselves, and "they" don't raise their rates, the market determines a mutual "cash rate" that reflects the changes in the supply of funds that have taken place as a result of RBA activity. The rate you mention can simply be thought of as a "price" for the borrowing of these funds. There is less money, therefore it will cost more to borrow it (Think of it as the same number of market participants chasing less funds, and it will follow logically). The implementation of DMO affects the entirety of the financial sector, to the extent that it interacts with the RBA, and will not render any institution less advantaged than another.

Im not sure you understood that ramble

Ya, I'm sure it'll be cool, considering the sheer artistry with which you've cut and pasted from every resource on the topic I can think of! In future, it'd be safer for you not to extrapolate beyond what you copy in, particularly when it has quite clearly been vacuously regurgitated and has no originality or personal thought processes underpinning it. Change that around, man! You'll be surprised how much richer the experience will get for you

im still not sure about it .. yeahh we have to give a powepoint presentation

Yeah, no probs! Being a ppt presentation, just remember to get it as striking and colourful as you can. You want to be able to arrest your asudience's attention as well as cover all the content you need to. I'd encourage you to whack in a flow chart outlining the process of monetary policy (both contractionary and expansionary - in other words, for the selling, or tightening, and buying, or loosening, of monetary policy). Also, you might want to make a pass at a few demand/supply curves and get a bit of a before and after DMO thing happening Yeah, and also, just try and keep it as simple as posssible. Don't use long, drawn out paragraphs. Write your large, clear bullet points so your audience can see and then dive into greater depth with your actual speech (you give a speech with ppt too, right?). And, yeah, other than that, best of luck

 

[lilkiwicutie89]

thanks .. heaps... yeahh my teacher gave me some pages about the monetary policy from a year 12 books seems quite complex ...

 

[Will Hunting]

No sweat! Hope your assignment goes well. Just remember to relax take your time getting to know the topics and the course. You have plenty of time, and, besides, it's never too late to brush up on something you're not so clear on. You'll be fine.

 

[jonnathann]

When banks have less money in their ES accounts, don't they lift the cash rate to maintain profit margins?

 

[Will Hunting]

Ya, obviously It follows as a natural consequence that the aforementioned movement in settlement funds would trigger an elevation of the cash rate. It is the nature of the price mechanism in this market to act in order to maintain profit margins (If there is less money, then the banks face less financial security in the short to medium term, to settle payments etc. and, therefore, raise the price of their assets to cover this threat).

If you are trying to poke a hole in my reasoning by suggesting it is the banks, and not the market forces, that raise the cash rate, you should consider this issue more closely and re-read what I had written earlier. DMO are exercised on a universal scale, in the sense that all participating institutions experience the same changing conditions in the short term money market (since all particpating insitutions hold funds in ES accounts with the RBA). Given this, the cash rate is dictated by the whole of this market in mutuality, rather than by individual banks just because they may feel their profits are in jeopardy (not to say that they aren't, but monetary policy places all institutions in the same relative position, since the market for settlement funds is communal, as far as the RBA is concerned).