FINM7407: Financial Institutions and Markets
Seminar 02 Monetary Policy and Interest Rates
Learning Objective: 2 Necmi K Avkiran, PhD Associate Professor in Banking and Finance UQ Business School n.avkiran@business.uq.edu.au http://www.users.on.net/~necmi/financesite/profile.htm

Overview of the seminar
          

Monetary policy RBA market operations Balance sheet of the RBA Determination of interest rates and factors that affect rates The yield curve Transmission mechanism Inflation and the Fisher Effect LIBOR and a bank’s funding curve BBSW Banks’ exposure to interest rate risk Case study: Crisis in Cyprus
FINM7407 Seminar 02 2

Monetary Policy


Monetary policy is an important tool used by governments to influence economic activity.



Since 1984, it has taken a particularly simple form— the Reserve Bank of Australia (RBA) sets the overnight rate in the interbank market on unsecured loans, a.k.a. the ‘cash rate’.


Currently, the cash rate on 15 July was 2.50%, with an inflation rate of 3% (see RBA’s web page to find more up-todate figures!).
FINM7407 Seminar 02 3

Monetary Policy – continued
Overview of Reserve Bank Objectives (i.e. ultimate targets)
An ‘ultimate target’ of monetary policy is a variable the authorities seek to influence because of its welfare impact. Lower inflation has been the principal ultimate target for some time.
    

Inflation target Stability of the Australian currency Maintenance of full employment Economic prosperity and welfare of the people Controlling asset price bubbles and maintaining a lower current account deficit (CAD). Australian Bureau of Statistics (ABS) reports the seasonally adjusted CAD for the March quarter of 2014 as $5672 million. *
4

(Search for the Financial Stability Review which provides RBA's assessment of the current condition of the financial system and