EXPLORING
YOUR OPTIONS
WHAT’S THE FUSS ABOUT
THE CASH RATE?
Dr Frédérique Bracoud
The fuss….
Cash rate target
2.00%
What is the cash rate?
The cash rate is the interest rate on
A.
B.
C.
D.
RBA loans to commercial banks.
mortgage loans to households.
loans among banks.
deposits that banks have at the RBA.
Not obvious for some people
….. even for chief economists in banks
….. or Wikipedia!
Overnight interbank interest rate
interest rate
End of the day
Bank A
$1,000,000
Bank B
The day after
Bank A
$1,000,055
2% per year ≈ 0.0055% per day
Bank B
Central bank money
The funds that banks lend to each other are very special.
█ NOT notes and coins
█ NOT balances in commercial bank deposit accounts
█ They are balances in deposit accounts at the RBA
can only be transferred among banks,
to the government or to the RBA
$
RBA
Behind the scene all the time!
Mobile phone monthly bill
paid by Will (bank account at Bank B)
to the Mobile phone provider (bank account at Bank C)
Bank B
$45
RBA
Bank C
$
Will’s bank
account
$45
$
Mobile Phone
provider’s
bank account
What if Bank B has not enough money?
Bank A
Payment system
Interbank Market
Bank C
Bank B
RBA
Interbank rate is a major cost for banks
banks
When the RBA changes the cash rate,
█ the costs of banks are affected
█ banks need to adjust the rates on their loans
(housing loans, personal loans, student loans….)
in order to maintain their profit margins.
High 7.50%
Historical
low 2.00%
Your life
Your Samsung Galaxy S6 may be at risk!
If your parents have a $300,000 mortgage loan,
an increase in the loan rate by 0.50 percentage point
will cost your parents approximately
█ an extra $100 a month in repayments
█ an extra $500 dollars in repayments between August and
Christmas!
Your parents may decide to buy you SOCKS instead of a
Samsung Galaxy S6!
Transmission of monetary policy
Bank
interest
rates
Cash
rate
Consumption
spending
Business
spending
Economic
growth
Net exports
Inflation
Exchange
rate $
Financial
markets
rates
Spending on
new Housing
Who decides the cash rate?
Commercial banks freely choose the cash rate.
The RBA cannot impose the cash rate on private
contracts.
What’s the trick then?
The trick
█ The RBA does not choose the cash rate in the private
█ contract but chooses a target, a desired level
█ The RBA manipulates the stock of central bank money
every day
RBA
█ The RBA can create situations where banks do not have
enough or where banks have too much central money
█ The RBA affects the conditions in the interbank market
and the cash rate
Demand and supply of central money
Cash rate
SS
S
Cash rate
chosen by
banks
Cash rate target: 2.00%
SD
Quantity of central
bank money
The fuss about the cash rate is because…
… the cash rate is the first target of monetary policy.
It affects the interest rates and the exchange rate
and ultimately the economic activity and inflation.
Tuesday 4th August 2015
Be prepared!
1.5%, 2.00% or 2.5%?
or
QUESTIONS &
COMMENTS
Thank you!
f.bracoud@uq.edu.au
THANK YOU FOR ATTENDING
UQ SCHOOLS DAY!
If you have any questions about
studying economics at UQ, visit
www.uq.edu.au/economics