Friday, January 25, 2013

INTEREST RATE CUTS







INTEREST RATE CUTS


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Executive summary
The economic growth of any nation is influenced by the policies implemented by the Federal Reserve Bank. Federal Reserve Bank is mandated to ensure stability of the economy by ensuring low unemployment rates and efficiency of commercial banks. The analysis of the Australian market reveals that the planners of the economy have adopted the use of interest rates to influence economic growth. Growth of the economy is realized through the establishment of the economic agents. Alterations of interest rates have been beneficial in the elimination of inflation and enhancement of economic growth. Monetary policies are extremely beneficial for the enhancement of economic growth. Based on the analysis of the market, the RBA enhanced a directive to hold the interest rate at 4.25 per cent. However, the commercial banks have not adjusted their interest rates because they perceive losses upon implementation. In reality, the commercial banks in the country have deprived the citizens of the benefits accruing to their savings by charging them higher interest rates. Furthermore, the banks have devised measures to reduce their costs by sacking other workers upon implementation of interest cuts to maintain profitability. The use of interest cut to correct disparities and enhance economic growth is common amongst the countries of the world. The analysis of Canada, India, and china reveals that interest cut is a vital monetary policy used to enhance the performance of the economy.




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Task 1
Over a period, the Australian economy has received extensive media coverage globally because of the measures employed by their Federal bank. The federal bank of Australia has efficiently employed the use of monetary policies to command public confidence in the economy. This move by the government has enhanced rapid development of Australian economy significantly. The analysis of findings conducted by researches on global economies reveals that Australian economy is one of the highest in developed economies. The success of the economy has largely been attributed to the decision of the economic planners to use interest rate fluctuation as a measure of alternating and controlling liquid cash available to the society for development. The RBA is charged with the realization of three vital functions that include maintenance of full employment, the establishment of development and prosperity amongst the Australian citizens and the ensuring the stability of the Australian currency. In order to perform these functions, the Reserve bank of Australia has developed monetary policies that are implemented to influence the operations of the market. The most vital policy used by the reserve bank is the alteration of interest rates. In this regard, the government of the nations has employed the use of monetary policies to enhance development of economic agents by employing the use appropriate monetary policy.

The government of Australia governs the establishment and operation of the Reserve bank. However, there are other banks in the economy that operates under the wing of financial institutions whose authorities are governed by the acts of the constitution. The aim of establishing these financial institutions is to derive profits like other businesses in the economy. In order to ensure an increase and guarantee of their profits, the financial institutions have joined to influence interbank transfer interest rates. The banks have ensured an increase in the interest rate to protect their profit margin.

The establishment of quantity of money circulating in the economy is one principal concern of the FBA. In this regard, the Federal Bank of Australia has employed the use of interest rates to ensure that desired quantity circulates in the economy. By increasing the interest rates, the citizens of Australia are discouraged from borrowing from the banks. Instead, they are encouraged to invest to earn interest accruing from their savings. This measure is applicable for wiping excess currency in the economy. On the other hand, the reduction of interest rates ensures increment in bank lending to the public. This has the effect of the increasing quantity of money in circulation. The alteration of interest rate is vital for the eradication of inflation in the economy. Inflation in the economy can be in two folds. It may arise where there are numerous commodities in the market followed by limited cash or it m arise due to high volume of cash in the economy purchasing limited commodities. In either case, the value of money is altered, and money looses value.

Because of globalization of world economies, foreign exchange is a vital element that is considered by the reserve banks before the implementation of monetary policies. A typical example is the move by the RBA to keep the interest rate on hold at 4.25 in the month of April. This decision was initiated by the expected changes in the global economy that could drive up the rates of inflation thereby altering the quantity of money in the economy. The actions taken by the Federal Bank of Australia are aimed at enhancing economic growth. Economic growth is achieved through the establishment of consumer satisfaction, business profitability, low unemployment rates and positive economic growth that enhances increase in the living standards.

Task 2
The government to ensure that the financial institutions in the economy obey the rules and regulations mandates the RBA to oversee their operations. Recently, the reserve bank of Australia implemented alteration of the interest of the interest rate to guarantee a hold of the interest rate. The economic planners has kept the interest rate stagnant at 4.25 per cent. This move by the bank should command the commercial banks to lower their rates for lending and borrowing. However, the banks are adamant to take the initiative because of the reasons established by the respective bank planners.

The concern by the FBA is based on the idea that banks are earning more profits from the public citizens through their savings and borrowing. In addition, the federal bank has also raised concerns because it has employed a cut on its rates. The cuts by the federal bank should be replicated by the commercial banks in the economy. Nevertheless, the banks have been adamant in implementing the interest cuts arguing that it will enhance reduction in their profitability.

In response to the demand by the federal bank, the commercial banks have stated that their interest rates will continue to hold. This means that they will not change the rates of interest. Over the period, the banks have continued to earn high profits because of the prevailing interest rates. The establishment of banks in the economy is for financial benefit. Banks operate in the economy as other businesses whose main objective is earned money through profits. The fluctuations in the global market have resulted in to the emergence of uncertainties in the global market. With the increase in the number of uncertainties, the businesses are faced with increased risks in their operations. In this regard, business managers often discover measures to overcome the risks. The association of commercial banks in Australia has instigated measures to ensure increased profitability in their ventures by holding interest rates. When the banks hold their interest rates, they cushion the profit to remain within the premises of the bank. The communities banking with the banks are sidelined by the banks’ ill motive of depriving the citizens of their moneys. The banks have continued to argue that when they employ the interest cuts as directed by Federal Reserve Bank, they will realize losses at the end of the trading period.

The decision by the federal bank of Australia directing the commercial banks to implement interest cuts has been met with threats from the banks. The banks have said the implemention of  interest cuts will lead to job cuts in the financial sector of the economy. This move follows the steps taken by the two leading lenders in the economy to implement the interest cuts that resulted in the loss of more than 3300 jobs. Recently, it has been discovered that ANZ and Westpac are planning on another backlash that will ensure 730 jobs are loosed. The analysis of the steps taken by the banks upon implementation of the interest cuts reveals that the banks have taken an initiative to transfer the losses they incur to the community. The reasons given by the banks are not satisfying that they are deemed at ensuring their own satisfaction.

In my honest opinion, i disagree that the banks should be transferring the losses to the community. The banks should enact the directive by the federal bank to implement interest cuts. The banks enactment of the interest cuts will ensure that the community is not burden with the expense of paying for higher interest rates that benefit the bank and managers. This statement is true because the banks have been mentioned to increase the salaries of their workers because of the vast profits accrued from high interest rates. In addition, commercial banks have continued to benefit from public savings. When they lend at higher rates, the banks have earned higher returns and control by the federal is extremely vital. In conclusion, bank managers have lain off some of their workers because of the implementation of interest cuts. In my opinion, this is pretence aimed at ensuring higher profits because the banks will continue to be profitable even after the implementation of the interest cuts.

Task 3
Over the period, the global economy has experienced fluctuations because of the great depression. The action of the massive depression has prompted the economic planners of various nations to implement correct measures. The federal banks of various economies are charged with the responsibility of ensuring stability of the economy. This is because during the period of economic uncertainty, the economic agents are inactive and business incurs losses, and the citizens are not satisfied.  The economic planners must, therefore, employ the use of monetary policies that includes alterations of interest rates to influence economic balance.

Analysis of Canadian economy
Analysis of the Canadian economy in the European nation has revealed the activity of the monetary policies. During the period of early 2011, the economies in Europe experienced stagnation in their performance. This stagnation was attributed to the shocks of the global market that influenced the local market because of the foreign exchange. In a bid, correct the disparities of the economy, the planners decided to use monetary policies of introducing more money into the economy. However, the introduction of quantity of money was not regulated with alteration in the interest cuts and this resulted in imbalance of the economy. In order to correct the economy, the interest rates were regulated by employing a cut to ensure excess money is eliminated from the economy.

Analysis of the Indian interest cuts
The Asian countries have also been adversely affected by fluctuations in the global market. These recessions have ensured that returns on investments are reduced. Because of this, majority of the population have diverted their resources from investments. The federal banks are equally active in all the economies and they are charged with the duty of ensuring stability of the economies. The Indian reserve bank has initiated corrective measures to help in the realization of a stable economy. The planners in the reserve bank have initiated development of the economic agents by lowering interest rates and promising stability until 2014. This initiative by the federal bank has ensured increased performance of the economy by igniting the agents of the economy. With the realization stability, the Federal Reserve has ensured increased investments that are beneficial for the economy. Therefore, interest cut is a vital monetary policy used by the Federal Reserve to enhance economic development.

Analysis of china economy
Over the period, the Chinese economy has emerged to be the fastest growing economy in Asia. The Chinese government has had concerns for its growth because of the fluctuations of the world market. The people’s bank of china has employed the use of interest rates to spur economic development. In a bid to combat the rising inflation, the bank has initiated measures to tighten fiscal policies regarding the operations of financial institutions. This regards the use of interest rate to alter the commercial banks reserve ratios. In the same regard, the bank has instigated the use of monetary policies like interest cut to combat inflation and increase economic growth. The implementation of this critical decision was done on 30th November because of concern for reduction in economic performance.

Conclusion
The Federal Reserve Bank in any economy is charged with the responsibility of ensuring stability of economy and ensuring development. This function is enabled through the enactment of monetary policies that ensure reduction in inflation and enhancement of economic growth. Alterations of interest rates are a significant tool commonly used by monetary policy implementers to increase the performance of economic agents. The Australian reserve bank has been on the forefront in establishing stable economic growth with interest rate cuts. The directive by the RBA to implement interest cuts has not been implemented by all the banks in the nation because they perceive losses upon implementation. The commercial banks in the country have continued to manipulate the citizens by employing the use of high interest in borrowing and retaining the earnings. The financial crisis experienced globally has led to the alteration of interest rates in various economies because the countries of the world share the global market and earn foreign exchange which is determined by prevailing interest rates.