Discuss the Main Functions of the Rba and Explain How and Why the Rba Can Influence Interest Rates and Economic Activity

Topics: Inflation, Economics, Money Pages: 4 (1347 words) Published: March 1, 2013
In our mixed economy, there is a need for regulation and intervention on interest rates and the general level of economic activity. Australia’s current healthy economy has been developed partly through the functions of the Reserve Bank of Australia (RBA). Their functions include; conducting monetary policy, acting as a banker to the government, settling transactions between banks, and ensuring financial stability. The priority function of the RBA is conducting monetary policy. It is an action designed to influence the cost and availability of money in the economy. One of the ways the RBA uses to influence interest rates is by maintaining their cash rate target through exchange settlement accounts. The cash rate is an interest rate on borrowing or lending of overnight loans between financial institutions in the money market. All licensed banks and financial institutions must set up an exchange settlement account which deals with everyday transactions between banks. However each night the account must be in credit. This means the banks which have a surplus of funds will lend it on the overnight short term money market where the banks in deficit will borrow these funds. A surplus in funds in the money market puts downward pressure on the cash rate and vice versa; a shortage of funds will put upward pressure. It is important to understand that the main reason the RBA are able to conduct these functions is due to the Commonwealth Government. The government gives the power to the RBA and other institutions they work with to manage parts of our economy. Having said this, the RBA manages the amount of funds in the money market to either influence the cash rate to go up or down. They do this through domestic market operations; the selling and purchasing of Commonwealth Government Securities (CGS) and Repurchase agreements (REPOS). If the RBA sold CGS or REPOS to banks, funds would be extracted from the system and thus the cash rate would rise. The cash rate the banks pay...
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