I want to explore something that’s getting quite a bit of airplay here in Australia and my suspicion is its something we will hear much more about… what’s the future of monetary policy and how will monetary policy be mobilised to defend any downturn in the economy?
“Unconventional Monetary policy” is the term often used. It became a thing during and after the global financial crisis. It didn’t make its way downunder, as fortunately thanks to forces beyond our control, we were saved from any real downturn. In fact we avoided a recession entirely. But before any real downturn is even upon us, influential people seem to be preparing us for its inevitable arrival.
JP Morgan’s Australian-based Chief Economist Sally Auld is just one fairly prominent industry member to say in recent months that the RBA should start to prepare to unleash unconventional monetary policy. Even Reserve Bank members like Deputy Governor Guy Debelle have openly stated that unconventional monetary policy is a tool in their arsenal if they feel its needed.
Further, whilst many view unconventional monetary policy actions as a “last resort” if the economy is really struggling and conventional monetary policy tools are not working, some are suggesting that unconventional tactics should be used more readily to support the economy.
Before we get on to “unconventional monetary policy”, it’s critical to properly understand “conventional” monetary policy. I’ve therefore decided to break this into two parts – today we will look at “conventional monetary policy” and next time deal with “unconventional monetary policy”.
Monetary Policy
Monetary policy is one of the three main components comprising of macroeconomic policy – the others being fiscal policy and the exchange rate. Together, these instruments can be manipulated in order to impact the broad economy.
Fiscal policy relates to government spending. How much do they spend and in what areas. Deficits and surpluses… tax cuts and infrastructure projects – that sort of stuff.
The exchange rate is the value of the Aussie dollar relative to other currencies. Although Australia has had a floating exchange rate since December 1983 and thus its value determined by market forces, fiscal and monetary policies can have a material impact on exchange rate.
Monetary policy is all about the price of money – controlling the interest rate in the wholesale money market.
Whilst the role of the central bank is certainly broader than just setting the cash rate, from a monetary policy perspective, that’s basically its only role and the only one we really want to focus on here.
The RBA
Setting monetary policy in Australia is the role of the Reserve Bank. The RBA was established in 1960 by the “Reserve Bank Act 1959”. Owned entirely by the Australian government, the bank is operated by a 9-member board appointed by the Treasurer and has close to 1,000 staff, most of which are based in Sydney.
Its role is outlined in the Act that created it, which is to ensure monetary and banking policy is used to help all Australians and, in consultation with the government, achieve the goals of:
Stability of the currency
The maintenance of full employment, and
The economic prosperity and welfare of the people of Australia
Broadly, “independence” between government and central bank is seen as an important thing. However, realistically, whilst politicians are not supposed to try and influence the central bank’s actions, we can hardly call the RBA “independent of the government”. The government owns it, created it and can change its powers or legislate it out of existence if they so desired.
What is monetary policy?
I’m going to be a bit lazy here… I had an insider contact at the RBA provide me the lowdown on how and why they manage monetary policy. Just joking… Below is straight from the RBA website (emphasis in bold is mine):
“The Reserve Bank of Australia is responsible for formulating and implementing monetary policy. Monetary policy decisions involve setting the interest rate on overnight loans in the money market. Other interest rates in the economy are influenced by this interest rate to varying degrees, so that the behaviour of borrowers and lenders in the financial markets is affected by monetary policy (though not only by monetary policy).”
“From day to day, the Bank’s Domestic Markets Department has the task of maintaining conditions in the money market so as to keep the cash rate at or near an operating target decided by the Board. The cash rate is the rate charged on overnight loans between financial intermediaries. It has a powerful influence on other interest rates and forms the base on which the structure of interest rates in the economy is built. The close relationship between the cash rate and other money market interest rates can be seen in the chart below. Changes in monetary policy mean a change in the operating target for the cash rate, and hence a shift in the interest rate structure prevailing in the financial system.”
“The Reserve Bank Board’s explanations of its monetary policy decisions are announced in a media release, which is distributed through electronic news services and published on the Reserve Bank’s website at 2.30 pm on the day of each Board meeting. Any change to the cash rate target will take effect from the following day.”
“The Reserve Bank uses its domestic market operations (sometimes called ‘open market operations’) to keep the cash rate as close as possible to the target set by the Board, by managing the supply of funds available to banks in the money market.”
“The cash rate is determined in the money market as a result of the interaction of demand for and supply of overnight funds. The Reserve Bank’s ability to pursue successfully a target for the cash rate stems from its control over the supply of funds which banks use to settle transactions among themselves. These are called exchange settlement funds, after the accounts at the Reserve Bank in which banks hold these funds.”
So “conventional” monetary policy is basically all about the RBA controlling the amount of funds in the interbank market – monitoring demand and supply and then trying to keep enough funds in the market to keep the market balanced at an interest rate consistent with their target interest rate – a task they do very successfully!
Okay…got that?
But what’s this control over an interest rate (relevant only to banks) supposed to achieve for the wider economy? Back to the RBA’s own info:
“Movements in the cash rate are quickly passed through to other capital market interest rates such as money market rates and bond yields. These interest rates are also influenced by the risk tolerance of investors and preferences for holding funds in a form that are readily redeemable. The cash rate and other capital market interest rates then feed through to the whole structure of deposit and lending rates. In Australia, most deposits and loans are at variable or short-term fixed rates, so there is a high pass through of changes in the cash rate to deposit and lending rates. But because of the other factors influencing capital market rates, and fluctuations in the level of competition in the banking sector, deposit and lending rates do not always move in lockstep with the cash rate.”
“The changes in interest rates affect economic activity and inflation with much longer lags, because it takes time for individuals and businesses to adjust their behaviour. Interest rates affect economic activity via a number of mechanisms. They can affect saving and spending behaviour of firms and households, as well as cash flow, the supply of credit, asset prices and the exchange rate, all of which affect the level of aggregate demand. In turn, developments in aggregate demand, in conjunction with developments in aggregate supply, influence the level of inflation in the economy. Inflation is also influenced by the effect that changes in interest rates have on imported goods prices, via the exchange rate, and through their effect on inflation expectations more generally in the economy.”
“The ways in which monetary policy affects the economy are far from mechanical in their operation. In aggregate, however, a general negative association between interest rates and both demand growth and inflation is clear. Substantial rises in interest rates, designed to restrain inflationary booms, have been followed by contractions in demand and a reduction in inflation. Conversely, substantial interest rate reductions have been followed by periods of significantly faster growth. In responding to cyclical developments and inflationary pressures, monetary policy has had a powerful influence on aggregate demand and inflation in the economy.”
Right okay… So controlling the “price of money” in the interbank market indirectly controls the “price of money” in broader financial markets. Importantly however, it has the greatest influence over the short-term money-market – see the chart above highlighting the relationship between the cash rate and 90/180 day bank bills.
Notice above that the RBA highlights how the majority of loan and deposit rates in Australia are variable (“floating”) or short-term fixed rates and therefore changes in the interbank cash rate flow quickly through to deposit and lending rates. That’s an important piece of information to file in the back of your memory as we work towards discussing “unconventional monetary policy”.
Let’s delve a little deeper into the actual mechanics of monetary policy on a day-to-day basis. Back to the RBA:
“On a day-to-day basis, the cash rate is determined by the supply and demand for exchange settlement (ES) funds. These funds are held in accounts at the Reserve Bank by banks (as well as a small number of other financial institutions) and are used by account holders to meet their payment obligations with each other and with the Reserve Bank. The Reserve Bank gauges the demand for ES funds. Through its domestic market operations, the Reserve Bank supplies enough ES funds to ensure that the cash rate remains close to the Board’s target.”
“Under arrangements introduced in November 2013, some Authorised Deposit-taking Institutions (ADIs) maintain a quantity of ES funds in their account as a buffer against intraday payments and payments they may need to settle after the time that the interbank cash market has officially closed. The size of these buffers is agreed in advance with the Reserve Bank and funds held for this purpose are paid interest at the Board’s target for the cash rate. Other account holders may also receive the cash rate target on a pre-agreed amount of funds in order to manage intraday payments. All balances held by ADIs under these arrangements are directly sourced through transactions between the ADIs and the Reserve Bank, with the funding rate on these transactions also set at the cash rate target.” “Any ‘surplus’ balances held by ES account holders are paid interest at a rate that is 25 basis points below the cash rate target. Although balances held at the central bank are risk-free (in contrast to an interbank loan), the 25 basis point differential is sufficiently wide to mean that ADIs seek to minimise their surplus balances; consequently, ADIs with surplus ES funds have an incentive to lend to those with a projected shortfall on their account.”
“Nevertheless, certain frictions in the cash market may make it difficult for funds to be fully recycled. For example, an ADI with surplus funds to lend may not wish to increase its credit exposure to the ADI that needs to borrow funds. As noted previously, the Reserve Bank seeks to maintain a supply of ES funds sufficient to ensure that these factors do not prevent the market clearing at the Board’s target.”
“Securities transactions are conducted almost every day in the ‘open market’ by the Reserve Bank. Each morning, the Reserve Bank announces its dealing intentions, inviting financial institutions to propose transactions that suit the Reserve Bank’s purposes. Counterparties are able to sell highly rated debt securities to the Reserve Bank either under repurchase agreement (repo) or outright sale. Under a repo, the seller agrees to repurchase the security at a future time and at a pre-agreed price. In many respects, the transaction is similar to a secured loan, with the difference between the purchase and repurchase prices representing the interest earned on the transaction. The Reserve Bank’s morning round of open market operations is based on an estimate of the net transactions that will settle that day between the Reserve Bank (and its clients) and ES account holders.”
“Late each afternoon, the Reserve Bank announces whether an additional round of open market operations is required. Uncertainty in the timing of payments to, and from, clients that hold accounts with the Reserve Bank (mainly the Australian Government) can give rise to unforeseen fluctuations in ES funds during the day. The additional round gives participants the opportunity to either lend excess balances back to the Reserve Bank or borrow the shortfall on a secured basis. Notably, the Reserve Bank assesses the need for these additional rounds on a system-wide basis rather than on the position of individual institutions, thereby preserving the incentives for institutions to participate in the interbank cash market.” “Very occasionally, the Reserve Bank might announce further additional rounds of open market operations later in the evening. These are conducted prior to the close of the SWIFT End Session.”
“An important influence on the composition of the Reserve Bank’s holdings of government securities is management of the impact of large maturities of Australian Government Securities (AGS) on system liquidity. This reflects the Reserve Bank’s need to offset the volume of funds that are paid out of the Australian Government’s account at the Reserve Bank into ES accounts (for the credit of the security holder) on the maturity date. In addition to using reverse repos and foreign exchange swaps to withdraw liquidity on the maturity date, the Reserve Bank makes purchases of the relevant AGS ahead of the maturity date. These purchases are undertaken to manage near term liquidity flows and have no implications for the Reserve Bank’s monetary policy stance.”
The RBA website really is a treasure trove of information. When I set about compiling this piece I had no intention of directly quoting from the RBA website as liberally as I have. But they’d done such a great job at explaining what it is they do.
Furthermore, there’s no disputing this – it’s straight from the horse’s mouth so I don’t want to hear any retorts of “nonsense, that’s not how it works”…
There’s quite a lot to absorb here. I’ll finish with a summary that we can build on next time:
In Australia, the Reserve Bank of Australia (RBA) is responsible for monetary policy.
Monetary policy is all about the RBA managing the “cash rate”.
The cash rate represents the interest rate on “exchange settlement” (ES) funds.
ES funds are funds held in accounts at the RBA by “authorised deposit-taking institutions” (banks). They are the funds banks use to settle payment obligations with the RBA as well as each other.
The cash rate is therefore the interest rate banks charge each other on overnight loans and is an interest rate relevant only to banks.
The RBA’s staff are in constant contact with staff at the banks, monitoring their payment obligations and therefore demand for ES funds.
The goal for both the commercial banks and the central bank is to have ES funds perfectly balanced, in aggregate.
The RBA transacts in the interbank market almost every day (sometimes multiple times), adding to or draining ES liquidity.
They do this by entering into securities transactions with the banks – purchasing or selling debt securities (largely government bonds) either on an “outright” basis or under a repurchase (repo) agreement.
Monetary policy’s effectiveness is because there is a close relationship between the cash rate and short-term rates in the money market – such as 90-day bank bills.
There is a prevalence for variable (“floating”) and short-term fixed rates in Australia, meaning that short-term money market rates have a meaningful influence on the interest rates applicable in the broader economy.
So one last time… A summary of the summary:
Monetary policy in Australia is about our central bank (the RBA) setting the interest rate applicable in the interbank market and then working closely with the banks to control liquidity in the interbank market in order to keep the interbank money market balanced at the desired interest rate.
The interest rate applicable to the interbank market closely resembles short-term interest rates in the broader economy and because deposit and lending rates are based off short term rates, the RBA can effectively influence interest rates in the broader economy.
Depending on your level of prior experience on the subject matter you might need to re-read this for it to sink in.
Next time we will be in a position to build on this as we step into the realm of “unconventional monetary policy”.
This document contains information which is the copyright of Aviator Capital Pty Ltd (AFSL 432803) or relevant third party. Any views expressed in this transmission are those of the individual, except where the individual specifically states them to be the views of Aviator Capital Pty Ltd. Except as required by law, Aviator Capital Pty Ltd does not represent, warrant and/or guarantee that the integrity of this document has been maintained nor is free of errors, interception or interference. You should not copy, disclose or distribute this document without the authority of Aviator Capital Pty Ltd. Aviator Capital Pty Ltd does not accept any liability for any investment decisions made on the basis of this information. This information is intended to provide general information only, without taking into account any particular person’s objectives, financial situation, taxation or needs. It does not constitute financial advice and should not be taken as such. Aviator Capital Pty Ltd urges you to obtain professional advice before proceeding with any financial investment.
Register your interest in this Fund
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Monetary Policy Pt1
Monetary Policy – Part 1
I want to explore something that’s getting quite a bit of airplay here in Australia and my suspicion is its something we will hear much more about… what’s the future of monetary policy and how will monetary policy be mobilised to defend any downturn in the economy?
“Unconventional Monetary policy” is the term often used. It became a thing during and after the global financial crisis. It didn’t make its way downunder, as fortunately thanks to forces beyond our control, we were saved from any real downturn. In fact we avoided a recession entirely. But before any real downturn is even upon us, influential people seem to be preparing us for its inevitable arrival.
JP Morgan’s Australian-based Chief Economist Sally Auld is just one fairly prominent industry member to say in recent months that the RBA should start to prepare to unleash unconventional monetary policy. Even Reserve Bank members like Deputy Governor Guy Debelle have openly stated that unconventional monetary policy is a tool in their arsenal if they feel its needed.
Further, whilst many view unconventional monetary policy actions as a “last resort” if the economy is really struggling and conventional monetary policy tools are not working, some are suggesting that unconventional tactics should be used more readily to support the economy.
Before we get on to “unconventional monetary policy”, it’s critical to properly understand “conventional” monetary policy. I’ve therefore decided to break this into two parts – today we will look at “conventional monetary policy” and next time deal with “unconventional monetary policy”.
Monetary Policy
Monetary policy is one of the three main components comprising of macroeconomic policy – the others being fiscal policy and the exchange rate. Together, these instruments can be manipulated in order to impact the broad economy.
Fiscal policy relates to government spending. How much do they spend and in what areas. Deficits and surpluses… tax cuts and infrastructure projects – that sort of stuff.
The exchange rate is the value of the Aussie dollar relative to other currencies. Although Australia has had a floating exchange rate since December 1983 and thus its value determined by market forces, fiscal and monetary policies can have a material impact on exchange rate.
Monetary policy is all about the price of money – controlling the interest rate in the wholesale money market.
Whilst the role of the central bank is certainly broader than just setting the cash rate, from a monetary policy perspective, that’s basically its only role and the only one we really want to focus on here.
The RBA
Setting monetary policy in Australia is the role of the Reserve Bank. The RBA was established in 1960 by the “Reserve Bank Act 1959”. Owned entirely by the Australian government, the bank is operated by a 9-member board appointed by the Treasurer and has close to 1,000 staff, most of which are based in Sydney.
Its role is outlined in the Act that created it, which is to ensure monetary and banking policy is used to help all Australians and, in consultation with the government, achieve the goals of:
Broadly, “independence” between government and central bank is seen as an important thing. However, realistically, whilst politicians are not supposed to try and influence the central bank’s actions, we can hardly call the RBA “independent of the government”. The government owns it, created it and can change its powers or legislate it out of existence if they so desired.
What is monetary policy?
I’m going to be a bit lazy here… I had an insider contact at the RBA provide me the lowdown on how and why they manage monetary policy. Just joking… Below is straight from the RBA website (emphasis in bold is mine):
“The Reserve Bank of Australia is responsible for formulating and implementing monetary policy. Monetary policy decisions involve setting the interest rate on overnight loans in the money market. Other interest rates in the economy are influenced by this interest rate to varying degrees, so that the behaviour of borrowers and lenders in the financial markets is affected by monetary policy (though not only by monetary policy).”
“From day to day, the Bank’s Domestic Markets Department has the task of maintaining conditions in the money market so as to keep the cash rate at or near an operating target decided by the Board. The cash rate is the rate charged on overnight loans between financial intermediaries. It has a powerful influence on other interest rates and forms the base on which the structure of interest rates in the economy is built. The close relationship between the cash rate and other money market interest rates can be seen in the chart below. Changes in monetary policy mean a change in the operating target for the cash rate, and hence a shift in the interest rate structure prevailing in the financial system.”
“The Reserve Bank Board’s explanations of its monetary policy decisions are announced in a media release, which is distributed through electronic news services and published on the Reserve Bank’s website at 2.30 pm on the day of each Board meeting. Any change to the cash rate target will take effect from the following day.”
“The Reserve Bank uses its domestic market operations (sometimes called ‘open market operations’) to keep the cash rate as close as possible to the target set by the Board, by managing the supply of funds available to banks in the money market.”
“The cash rate is determined in the money market as a result of the interaction of demand for and supply of overnight funds. The Reserve Bank’s ability to pursue successfully a target for the cash rate stems from its control over the supply of funds which banks use to settle transactions among themselves. These are called exchange settlement funds, after the accounts at the Reserve Bank in which banks hold these funds.”
So “conventional” monetary policy is basically all about the RBA controlling the amount of funds in the interbank market – monitoring demand and supply and then trying to keep enough funds in the market to keep the market balanced at an interest rate consistent with their target interest rate – a task they do very successfully!
Okay…got that?
But what’s this control over an interest rate (relevant only to banks) supposed to achieve for the wider economy? Back to the RBA’s own info:
“Movements in the cash rate are quickly passed through to other capital market interest rates such as money market rates and bond yields. These interest rates are also influenced by the risk tolerance of investors and preferences for holding funds in a form that are readily redeemable. The cash rate and other capital market interest rates then feed through to the whole structure of deposit and lending rates. In Australia, most deposits and loans are at variable or short-term fixed rates, so there is a high pass through of changes in the cash rate to deposit and lending rates. But because of the other factors influencing capital market rates, and fluctuations in the level of competition in the banking sector, deposit and lending rates do not always move in lockstep with the cash rate.”
“The changes in interest rates affect economic activity and inflation with much longer lags, because it takes time for individuals and businesses to adjust their behaviour. Interest rates affect economic activity via a number of mechanisms. They can affect saving and spending behaviour of firms and households, as well as cash flow, the supply of credit, asset prices and the exchange rate, all of which affect the level of aggregate demand. In turn, developments in aggregate demand, in conjunction with developments in aggregate supply, influence the level of inflation in the economy. Inflation is also influenced by the effect that changes in interest rates have on imported goods prices, via the exchange rate, and through their effect on inflation expectations more generally in the economy.”
“The ways in which monetary policy affects the economy are far from mechanical in their operation. In aggregate, however, a general negative association between interest rates and both demand growth and inflation is clear. Substantial rises in interest rates, designed to restrain inflationary booms, have been followed by contractions in demand and a reduction in inflation. Conversely, substantial interest rate reductions have been followed by periods of significantly faster growth. In responding to cyclical developments and inflationary pressures, monetary policy has had a powerful influence on aggregate demand and inflation in the economy.”
Right okay… So controlling the “price of money” in the interbank market indirectly controls the “price of money” in broader financial markets. Importantly however, it has the greatest influence over the short-term money-market – see the chart above highlighting the relationship between the cash rate and 90/180 day bank bills.
Notice above that the RBA highlights how the majority of loan and deposit rates in Australia are variable (“floating”) or short-term fixed rates and therefore changes in the interbank cash rate flow quickly through to deposit and lending rates. That’s an important piece of information to file in the back of your memory as we work towards discussing “unconventional monetary policy”.
Let’s delve a little deeper into the actual mechanics of monetary policy on a day-to-day basis. Back to the RBA:
“On a day-to-day basis, the cash rate is determined by the supply and demand for exchange settlement (ES) funds. These funds are held in accounts at the Reserve Bank by banks (as well as a small number of other financial institutions) and are used by account holders to meet their payment obligations with each other and with the Reserve Bank. The Reserve Bank gauges the demand for ES funds. Through its domestic market operations, the Reserve Bank supplies enough ES funds to ensure that the cash rate remains close to the Board’s target.”
“Under arrangements introduced in November 2013, some Authorised Deposit-taking Institutions (ADIs) maintain a quantity of ES funds in their account as a buffer against intraday payments and payments they may need to settle after the time that the interbank cash market has officially closed. The size of these buffers is agreed in advance with the Reserve Bank and funds held for this purpose are paid interest at the Board’s target for the cash rate. Other account holders may also receive the cash rate target on a pre-agreed amount of funds in order to manage intraday payments. All balances held by ADIs under these arrangements are directly sourced through transactions between the ADIs and the Reserve Bank, with the funding rate on these transactions also set at the cash rate target.”
“Any ‘surplus’ balances held by ES account holders are paid interest at a rate that is 25 basis points below the cash rate target. Although balances held at the central bank are risk-free (in contrast to an interbank loan), the 25 basis point differential is sufficiently wide to mean that ADIs seek to minimise their surplus balances; consequently, ADIs with surplus ES funds have an incentive to lend to those with a projected shortfall on their account.”
“Nevertheless, certain frictions in the cash market may make it difficult for funds to be fully recycled. For example, an ADI with surplus funds to lend may not wish to increase its credit exposure to the ADI that needs to borrow funds. As noted previously, the Reserve Bank seeks to maintain a supply of ES funds sufficient to ensure that these factors do not prevent the market clearing at the Board’s target.”
“Securities transactions are conducted almost every day in the ‘open market’ by the Reserve Bank. Each morning, the Reserve Bank announces its dealing intentions, inviting financial institutions to propose transactions that suit the Reserve Bank’s purposes. Counterparties are able to sell highly rated debt securities to the Reserve Bank either under repurchase agreement (repo) or outright sale. Under a repo, the seller agrees to repurchase the security at a future time and at a pre-agreed price. In many respects, the transaction is similar to a secured loan, with the difference between the purchase and repurchase prices representing the interest earned on the transaction. The Reserve Bank’s morning round of open market operations is based on an estimate of the net transactions that will settle that day between the Reserve Bank (and its clients) and ES account holders.”
“Late each afternoon, the Reserve Bank announces whether an additional round of open market operations is required. Uncertainty in the timing of payments to, and from, clients that hold accounts with the Reserve Bank (mainly the Australian Government) can give rise to unforeseen fluctuations in ES funds during the day. The additional round gives participants the opportunity to either lend excess balances back to the Reserve Bank or borrow the shortfall on a secured basis. Notably, the Reserve Bank assesses the need for these additional rounds on a system-wide basis rather than on the position of individual institutions, thereby preserving the incentives for institutions to participate in the interbank cash market.”
“Very occasionally, the Reserve Bank might announce further additional rounds of open market operations later in the evening. These are conducted prior to the close of the SWIFT End Session.”
“An important influence on the composition of the Reserve Bank’s holdings of government securities is management of the impact of large maturities of Australian Government Securities (AGS) on system liquidity. This reflects the Reserve Bank’s need to offset the volume of funds that are paid out of the Australian Government’s account at the Reserve Bank into ES accounts (for the credit of the security holder) on the maturity date. In addition to using reverse repos and foreign exchange swaps to withdraw liquidity on the maturity date, the Reserve Bank makes purchases of the relevant AGS ahead of the maturity date. These purchases are undertaken to manage near term liquidity flows and have no implications for the Reserve Bank’s monetary policy stance.”
The RBA website really is a treasure trove of information. When I set about compiling this piece I had no intention of directly quoting from the RBA website as liberally as I have. But they’d done such a great job at explaining what it is they do.
Furthermore, there’s no disputing this – it’s straight from the horse’s mouth so I don’t want to hear any retorts of “nonsense, that’s not how it works”…
There’s quite a lot to absorb here. I’ll finish with a summary that we can build on next time:
So one last time… A summary of the summary:
Monetary policy in Australia is about our central bank (the RBA) setting the interest rate applicable in the interbank market and then working closely with the banks to control liquidity in the interbank market in order to keep the interbank money market balanced at the desired interest rate.
The interest rate applicable to the interbank market closely resembles short-term interest rates in the broader economy and because deposit and lending rates are based off short term rates, the RBA can effectively influence interest rates in the broader economy.
“Conventional monetary policy” – pretty simple really…
Depending on your level of prior experience on the subject matter you might need to re-read this for it to sink in.
Next time we will be in a position to build on this as we step into the realm of “unconventional monetary policy”.
This document contains information which is the copyright of Aviator Capital Pty Ltd (AFSL 432803) or relevant third party. Any views expressed in this transmission are those of the individual, except where the individual specifically states them to be the views of Aviator Capital Pty Ltd. Except as required by law, Aviator Capital Pty Ltd does not represent, warrant and/or guarantee that the integrity of this document has been maintained nor is free of errors, interception or interference. You should not copy, disclose or distribute this document without the authority of Aviator Capital Pty Ltd. Aviator Capital Pty Ltd does not accept any liability for any investment decisions made on the basis of this information. This information is intended to provide general information only, without taking into account any particular person’s objectives, financial situation, taxation or needs. It does not constitute financial advice and should not be taken as such. Aviator Capital Pty Ltd urges you to obtain professional advice before proceeding with any financial investment.
Register your interest in this Fund
Lorem ipsum dolor sit amet, consectetur adipiscing elit. Ut elit tellus, luctus nec ullamcorper mattis, pulvinar dapibus leo.