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Answer 2
Cash rate is the official term for bank rate in Australia and New Zealand. It is the interest rate, which the central bank of the country uses to charge on the loans and advances to the commercial banks. In Australia, the cash rate is set by the Reserve Bank of Australia. It is also known as interbank overnight rate, as it is decided by the RBA on the basis of overnight unsecured funds (RBA, 2017).
RBA changes cash rate when it wants to change the monetary policy of the country. When the monetary policy needs to be eased, the cash rate is lower, and when the monetary policy needs to tighten, the cash rate is set to be higher. The cash rate has the maximum influence on the other interest rates of the economy and it forms the basis for other rates in the money market. The cash rate is changed to maintain an appropriate level of inflation in the economy (Worthington & Valadkhani, 2014).
The RBA board has a meeting once a month to decide the level of the cash rate, if that would be higher, lower or remain same. The decision is influenced by factors such as, inflation, status of the AUD, GDP of Australia, the housing market, and consumers’ confidence on the market. If the central bank wants to increase the money circulation in the economy by encouraging more spending and stimulate economic growth, then they lower the cash rate. If they want to control the upward growing inflation, then they increase the cash rate and that helps in controlling the expenditures by the consumers across the economy (Worthington & Valadkhani, 2014).
In April 2017, the cash rate was significantly lower at 1.50%, and inflation rose to 2.1% from 1.5% in the first quarter of 2017. The inflation rate was quite lower in the past five years, and accordingly the cash rate went lower from 4.75% to 1.50% (Tradingeconomics.com, 2017). The trend in the inflation rate is downward sloping, so is the cash rate. When the cash rate goes up, the money lenders hike their rates too, and when the cash rate is low, the lenders lower their rates.
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Figure 1: Inflation trend in Australia 2012-2017
The RBA calculates its cash rate based on the data provided by the banks and other financial institutions of the country. The Reserve Bank Survey is a survey done by the RBA once in a month to have an idea about the ext financial move by the bank. The experts make prediction about the next moves and based on that, the RBA decides whether to fix the interest rates, raise it or lower it. Accordingly, the money circulation changes in the economy (finder.com.au., 2016).
As the Dow Jones has a strong performance, the economic situation in Australia is more or less stable with growth of GDP at 2.4%, inflation rate 1.5% and cash rate 1.5%.
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Figure 2: Forecast of growth in the next 6 months
The figure shows that the growth rate of Australia is upward rising.
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Figure 3: Inflation trend forecast for the next 6 months
The inflation rate is also upward rising. Hence, the RBA might lower the cash rate further to control inflation in the economy.
References:
finder.com.au. (2016). What will happen to interest rates in 2017?. Retrieved 26 April 2017, from https://www.finder.com.au/2016-in-review-and-the-rba-cash-rate
RBA. (2017). Education – Monetary Policy. Reserve Bank of Australia. Retrieved 26 April 2017, from https://www.rba.gov.au/education/monetary-policy.html#how_is_mp_implemented
Tradingeconomics.com. (2017). Australia Inflation Rate | 2012-2017. Retrieved 26 April 2017, from https://www.tradingeconomics.com/australia/inflation-cpi
Worthington, A. C., & Valadkhani, A. (2014). The Cash Rate and the Consumer: A Modern Australian Socio-Politico-Economic Saga. American Council on Consumer Interests.
