Monetery Policy Essay Research Paper Explain the

Monetery Policy Essay, Research Paper

Explain the operation of Monetary Policy in the Australian Economy. Outline the current settings of Monetary Policy. Explain the predicted future direction of interest rate movement in relation to inflation and economic growth. The Reserve Bank Of Australia uses Monetary Policy to influence the level of aggregate, or total, money supply of financial intermediaries. The aims of the RBA are to maintain sustainable economic growth in a low inflationary environment with full employment. The RBA enters the short-term money market via the exchange settlement accounts by buying and selling Government securities to adjust the overnight cash rate. The Reserve Bank of Australia is a statutory authority, established by an Act of Parliament. This Act gives the Bank specific powers and obligations; it also underlines its separateness from government compared with, for example, a Department of State. The Act charges the Bank with the responsibility for developing and use monetary policy. The Reserve Bank Board’s obligations with respect to monetary policy are laid out in the Act. The Act permits the Bank to use a wide range of instruments in its market operations. Among other things, it allows the Bank to take deposits, borrow and lend money, buy and sell securities, discount and rediscount bills of exchange and promissory notes, and deal in foreign exchange, gold and other precious metals. Market operations are conducted in government securities. Transactions are mainly in the form of repurchase agreements (usually called “repos”), which involve the sale or purchase of securities with an undertaking to reverse the transaction at an agreed date in the future and at an agreed price. The RBA buys and sell bonds to influence certain problems in the economy, if in the future they buy bonds this causes the money supply to increase and there will also be an expanding of the economy. If in the future the RBA sells bonds then the economy will contract and investment will rise as well as money supply decreasing. The current stance of Monetary Policy seems in an extensive manner, quite appropriate for the current position of the Australian economy. Currently, under the uncertain conditions, Monetary Policy is being determined not only by the level of official interest rates, but also by the interest rates faced by borrowers which have gone down over the past year. It is also being determined by the level of the exchange rate, which is helping Australia achieve greater competition in export prices, as well as the state of asset and credit markets. Currently the RBA is balancing all these different factors and Monetary Policy will remain under continued review in the venture of improving international and domestic conditions. When looking at the current settings of Monetary Policy, we are looking at the way in which the RBA is currently using the level of interest rates. Short-term interest rates are determined by the RBA s stance and control of the overnight cash-rate. These interest rates can be adjusted by the RBA s determination to enter the short-term money market as either a buyer or seller of securities through exchange settlement accounts on the short- term money market. The RBA, inflationary expectations and market forces, influence long-term interest rates, both domestic and international. Over the past twelve months, interest rate levels have not changed drastically. They have fallen slightly. The RBA s job is to ensure price stability by targeting official interest rates at inflation. The aim is to keep the economy on a steady path of growth, avoiding excessive peaks and troughs. It does this by using an inflation target of between 2 and 3 percent over the course of the economic cycle. Underlying inflation has averaged at 2.1 per cent over the life of the target and currently, the level is well below this at 1.6 per cent. Monetary policy aims to contribute to the achievement of sustainable growth. Its principal contribution to this objective in the long-run is to control inflation. The instrument which monetary policy uses is the overnight interest rate in the money market – the “cash” rate. The Bank has quite close control over this interest rate through its domestic market operations. For many years, inflation in Australia was too high, which caused economic and financial efficiency, upsetting the economy’s long-run growth potential, and having negative effects on equity. In the 1990s, a climate of low inflation has been re-established. Inflation has averaged 2 1/4 per cent in the five years to 1997 and in turn average growth in real output of 3 1/2 per cent. Unemployment is currently at 7.4 per cent. The Government is aiming to reduce economic growth and maintain it above a point, which would stabilize unemployment. The overall philosophy of these policies is to create a climate that would stimulate business investment and greater export opportunities through improved international competitiveness and also policies which would maintain consumer confidence. This is being achieved through an expansionary monetary policy stance and a continuation of micro-economic reforms.

Uncertainty in the American, Asian and European economies has seen the Australian Dollar depreciate, which may make the RBA consider increasing interest rates to maintain its value. But the strength of Australian growth over the September quarter in 1998 and the fears of higher impo