Week 7 - Implementation of Monetary Policy - Part I

Question 1

How is the monetary policy stance of Australia expressed?

Answer 1

In terms of a target for the cash rate (the interest rate on unsecured overnight loans between banks)

Question 2

What is the most importance influence on the pricing in the interbank loans market?

Answer 2

The level of aggregate balances that banks hold in their ES accounts at the reserve bank.

Question 3

How does the reserve bank influence the cash rate?

Answer 3

By operating in the financial market in such a way as they control the aggregated balances of Financial institution ES balances.

Question 4

What happens when the aggregate balances that banks hold in their ES accounts increases?

Answer 4

Account holders seek to lend excess funds and so the cash rate decreases.

Question 5

What happens when the aggregate balances that banks hold in their ES accounts decreases?

Answer 5

Account holders lend less and are more interested in borrowing and so the cash rate increases.

Question 6

What interest rate does the RB pay on balances held in ES accounts?

Answer 6

25 basis points below the target cash rate.

Question 7

What interest rate does the RB charge on an overnight secured loan to an ES account holder?

Answer 7

25 basis points above the target cash rate.

Question 8

What range does the RB interest rate on loans/balance aim to keep the cash rate within?

Answer 8

25 basis points above/below the target.

Question 9

What is the relationship between levels of ES balances and the level of the TARGET cash rate?

Answer 9

There is no relationship, the levels of the ES balances put upward or downward pressure on the ACTUAL cash rate but do not correlate with the target rate.

Question 10

What is the typical days operation for the RB?

Answer 10

Injecting ES balances by buying securities under repos