Considerations for Cash Rate Decisions

Considerations for Cash Rate Decisions 1
CONSIDERATIONS FOR CASH RATE DECISIONS
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Considerations for Cash Rate Decisions 2
CONSIDERATIONS FOR CASH RATE DECISIONS
Introduction
The Reserve Bank Act (RBA) (1959) mandates the Reserve Bank Board (RBB) in
Australia to undertake monetary policies in a manner that in RBB’s opinion, contributes to AUD
currency stability, full employment maintenance and welfare and economic prosperity of
Australians (McCredie, Docherty, Easton and Uylangco 2016). These three objectives enables
RBB to emphasize on currency (price) stability that is vital precondition for lasting growth of
economy alongside employment as it consider implications of monetary policy (MP) for short-
term activities and levels of employment. RBB aims at achieving the consumer price inflation
(CPI) of 2-3% per year over the medium term. Cash rate (CR) remains the MP’s instrument in
Australian and all decisions regarding cash rate are made by RBB that meets 11 times per annum
every first Tuesday of month apart from January. Thus, this paper uses the information drawn
from the meetings’ minutes and associated statements by government including 8 Nov 2006, 8
Oct 2008, 3 Nov 2010, 3 August 2016 and 3 April 2019 minutes and statements to critically
analyze the specific considerations RBB take into account when making decisions regarding the
cash rate.
Considerations Affecting Cash Rate Decisions
The RBB implements the MP by undertaking transactions in local money markets. Such
transactions are primarily carried out in the auction after the public announcement to every
commercial bank that Central Bank (CB) intends to purchase or sell cash (McCririck and Rees
2017). A price that any commercial bank is willing to pay will determine who is (not), successful
in getting cash. Such aan auction approach is known as the “Open Market Operations” or OMO.

Considerations for Cash Rate Decisions 3
The implementation of MP is understood in terms of five aspects of cash market which include
price, quantity, supply, and demand as well as policy interest rate corridor.
From the overhead mentioned minutes and statements, various factors are considered by
RBB in cash rate or interest rate determination. These factors include inflation, unemployment,
wage growth, household debt, AUD, overseas demand and consumer confidence index (CPI).
MP decisions get expressed as a target for CR that is the overnight money market IR. After every
RBB’s meeting, a media release gets issued at 2:30 PM announcing alterations in CR target
effective the next day.
Inflation
Inflation refers to the general rise in prices of goods and services. When it takes place,
consume purchasing power (CPP) gets diminished as the living cost has surged (Makin, Robson
and Ratnasiri 2017). RBA keenly monitors inflation and always considers figures of inflation
when making decision about the movements of interest rate (IR). Where the RBA believes
inflation stays extremely high, it will increase IR to slow growth of economy, and RBA trusts
inflation is extremely low, it will reduce IR to enhance growth of economy. For example, in the
minutes of meeting held on 3 Oct 2006, inflation was a key consideration for MP. The minutes
showed that the main international factors that the RBB considered in its recommendation to
surge the CR of 25 basis points to 6.25% in November 2006 were that the board believed that
growth would continue at beyond-average in the year 2007, despite the slowing in the United
States.
On local perspective, the Board indicated that even though the effects of previous surges
in CR in Australia were yet to reflect their full impact, it projections for underlying Australian
inflation was for it to hover around 3% over the next two years. Thus, the RBB considered that