Former Reserve Bank of Australia (RBA) Governor Phil Lowe says that the RBA cash rate is the interest rate in the Australian:
The RBA cash rate is the shortest term interest rate in the money market. Specifically, it's the interest rate on unsecured overnight loans between banks.
The money market is a wholesale debt market where banks, insurers, superannuation funds and other large institutions borrow and lend.
Former RBA Governor Phil Lowe says that if the economy is growing very strongly, then prices might be growing too:
if the economy is growing very strongly, then prices might be growing too fast and the RBA board may need to raise the cash rate to slow GDP growth and inflation down to within the RBA's 2 to 3 percent inflation target band.
Former RBA Governor Phil Lowe says that when the RBA raise interest rates, homeowners' mortgage loan interest expense will be:
When the RBA raise the cash rate, homeowners' (variable interest rate) mortgage loan interest expense will be higher, leaving them less to spend on consumption at the shops.
This is known as the 'cash flow channel', one of many monetary policy transmission mechanisms.
Question 1018 RBA cash rate, monetary policy, foreign exchange rate
RBA Governor Phil Lowe says that when the RBA raises the cash rate (by surprise), the Australian dollar (AUD) tends to:
If the RBA were to raise the cash rate unexpectedly, then the AUD would tend to appreciate against the USD, so the USD per AUD quote number would increase from say 0.7 to 0.71 USD per AUD.
This is known as the 'exchange rate channel', one of many monetary policy transmission channels.
Note that if the RBA were to raise interest rates and the market fully expected that to happen, there is unlikely to be any change in the AUD per USD since it would already have been priced into the value of the currency already in the past when the news first became known. Only surprises should affect the exchange rate in an efficient market. For example, the AUD would be expected to appreciate against the USD if the RBA raised the cash rate more than expected, or better than expected Australian GDP growth data was announced.
Question 1019 RBA cash rate, monetary policy, wealth effect
Former RBA Governor Phil Lowe says that when the RBA raise the cash rate, asset prices tend to:
If the RBA were to raise the cash rate unexpectedly, then asset prices including real estate, stocks and fixed-coupon bonds would tend to fall, making asset-holders feel poorer and likely to spend less on consumption at the shops.
This is known as the 'wealth effect'', one of many monetary policy transmission channels.
Note that if the RBA were to raise interest rates and the market fully expected that to happen, there is unlikely to be any change in asset prices since it would already have been priced into the asset values in the past when the news first became known. Only surprises should affect asset prices in an efficient market. For example, stock and house prices would be expected to fall if the RBA raised the cash rate more than expected, or higher than expected Australian inflation data was announced, which the market would anticipate will lead to higher RBA cash rates.
Question 1020 Federal funds rate, monetary policy, dot plot
US Federal Reserve Chair Jerome Powell showed the 'dot plot' of Federal Open Market Committee (FOMC) members' estimated future Fed fund rates following their quarterly summary of economic projections on 15 Dec 2021. The dot plot shows that committee members intended to make monetary policy more:
If the RBA were to raise the cash rate unexpectedly, then asset prices including real estate, stocks and fixed-coupon bonds would tend to fall, making asset-holders feel poorer and likely to spend less on consumption at the shops.
This is known as the 'wealth effect'', one of many monetary policy transmission channels.
Note that if the RBA were to raise interest rates and the market fully expected that to happen, there is unlikely to be any change in asset prices since it would already have been priced into the asset values in the past when the news first became known. Only surprises should affect asset prices in an efficient market. For example, stock and house prices would be expected to fall if the RBA raised the cash rate more than expected, or higher than expected Australian inflation data was announced, which the market would anticipate will lead to higher RBA cash rates.
Below is the Australian central bank’s cash rate.
From 2011 to 2017 the Australian central bank has implemented:
From 2011 to 2017 the Reserve Bank of Australian (RBA) cut the nominal interest rate which is called expansionary monetary policy. It's also called easing or dovish monetary policy.
Central banks cut interest rates when the economy is growing too slowly and is in danger of entering recession, often defined as two consecutive quarters of negative GDP growth. Recessions are harmful because they cause high unempoyment, low economic growth and low living standards.
Lower interest rates discourage saving and encourage more borrowing, consumption and investment which boosts GDP growth, employment and inflation.
Which of the following is NOT the Australian central bank’s responsibility?
No explanation provided.
Question 1021 Federal funds rate, monetary policy, quantitative easing, tapering
US Fed Chair Jerome Powell held a news conference following the 25-26 January 2022 FOMC meeting.
Nick Timiraos reporting for The Wall Street Journal asked: "Raising rates and reducing the balance sheet both restrain the economy, both tighten monetary policy. How should we think about the relationship between the two? For example, how much passive runoff is equal to every quarter percentage point increase in your benchmark rate?"
Jerome Powell replied: "So, again, we think of the balance sheet as moving in a predictable manner, sort of in the background, and that the active tool meeting to meeting is not -- both of them, it's the federal funds rate. There are rules of thumbs. I'm reluctant to land on one of them that equate this. And there's also an element of uncertainty around the balance sheet. I think we have a much better sense, frankly, of how rate increases affect financial conditions and, hence, economic conditions. Balance sheet is still a relatively new thing for the markets and for us, so we're less certain about that." (US Fed, 2022)
When Nick Timiraos mentioned 'reducing the balance sheet', he's referring to:
'Tapering' is the term used to describe when central banks such as the US Federal Reserve Bank reduce balance sheets by decreasing asset purchases. Tapering is the unwinding of qunatitative easing. It's also known as non-conventional monetary policy easing since long term bond yields are manipulated rather than the short term money market Fed funds rate which is how monetary policy is conventionally implemented.
For example, If the US Fed bought less US government bonds each month, this will decrease demand for bonds, lowering their price and raising their yield. These higher long term yields are likely to reduce US gross domestic product (GDP) growth and inflation, hence why this is said to restrain the economy and tighten monetary policy at the 'long end' of the yield curve that depicts long term bond yields, rather than the short end which depicts the Federal funds rate in the US money market.
'Passive runoff' is the dollar reduction in the Fed's balance sheet that occurs due to the Fed's bond assets being repaid when they mature. It's passive since the Fed need not buy or sell the bonds for the repayment to occur. If the Fed were to actively sell off bonds, they would sell them on the market prior to when they matured.
Here's a graph of US Federal Reserve assets which shows past periods of quantative easing and tapering: https://fred.stlouisfed.org/series/WALCL