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.
Table of Contents
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.
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