Case Study on RBA Cash Rate Decision

Running Head: CASE STUDY ON RBA CASH RATE DECISION 1
STUDY ON RBA CASH RATE DECISION
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CASE STUDY ON RBA CASH RATE DECISION 2
The RBA which stands for the Reserve Bank of Australia is the Australia’s central bank.
It derives its powers and functions from Reserve Bank Act which was established in the year
1959 (Brown, & Karpavičius, 2017). The duties played by the central Bank of Australia consist
of; ensuring that Australia’s currency remains stable, the level of employment in the country is
high and ensuring that there is well being of the citizens and Australian economy prospers. The
method used by the Australian central bank to ensure that these duties are achieved is by setting
the cash rate, bank notes issuing, efficient system payments, and finally maintenance of strong
systems in finance. The RBA also makes provision of banking services as required by the
Government of Australia and its agencies, and also a number of central banks overseas. The
Australian central bank in addition does gold and foreign exchange management. The location of
the central bank of Australia head office is in Sydney with more branches overseas and also
around Australia itself. The bank is supported by the Information management Policy in the
creation, storage and the usage of information in digital environment thus equipping the bank
with the Governments Transition Policy. The bank is responsible for controlling the cash rate
because it sets the target interest rate for the overnight funds. The RBA uses cash rate as the as
the instrument of monetary policy and as a result uses it to influence the cash rate through its
financial market operations (Cusbert, & Kendall, 2018). The decisions on how to change the
market rate are made by the Reserve Bank of Australia board members and the then afterwards a
media report making announcement on the decisions that have been made at 2.30 pm.
Question 1: Why does the RBA takes into account the domestic (Australian) and global (China,
Japan, and USA) macroeconomic indicators (GDP growth rate, investment, household
consumption, inflation, unemployment, and exchange rate) when making a decision whether to
change (increase or decrease) or keep the official cash rate unchanged? Explain.

CASE STUDY ON RBA CASH RATE DECISION 3
The Reserve Bank of Australia (RBA) looks into account and compares domestic and
global macroeconomic indicators because comparing the two brings out the best future
performance that reflect the position of the economy of Australia before agencies and the real
economic action occurs (Lane, & Rosewall, 2015). The reason behind this is that the Reserve
Bank of Australia has been given the task of ensuring that there is prosperity and well-being of
the people of Australia. To achieve this goal, they use the monetary policy in attempting to
control inflation, stabilize the Australian currency, maintain full employment in Australia, ensure
well-being of people of Australia and finally promote economic prosperity. The decision to
compare the domestic and the global economy depends on the amount of money circulating in
the economy which makes the RBA decide on whether to lower, raise or maintain the cash rate
(Chen, Zhang, Tam, & Wu, 2018). This is the point where the comparison is made between the
strengths of the larger growing economies i.e. the global economies and the domestic economy.
For the international economic conditions the Reserve Bank of Australia account for the
strengths of the global economy in terms of housing markets, the demand of the consumer and
the performance of the currencies. On the other side of domestic economic conditions, the
performance of the economy in terms of employment and unemployment level is checked. High
unemployment increases the chances of rate decreases because low rates boost business
expenditure, investments and the overall job employment. The inflation level is also checked
because when the inflation is high, it increases the chances of the consumer demand. In the
process of fighting inflation in the country RBA raised the cash rate to keep the inflation low
something they have done for many years to maintain inflation between 2 – 3%. RBA also
checks the business and consumer confidence because when business or consumer confidence is
low, then these two stimulate the likelihood of cash rate decrease because cash rate decrease

CASE STUDY ON RBA CASH RATE DECISION 4
stimulates demand hence business expansion. The level of household debt is also looked at. It is
known historically that lower interest rates tend to boost the price of housing in capital city
business areas. Other methods such as the restriction on requirement of lending may also be
more effective in the control of housing market. The currency of the nation i.e. the nation of
Australia also tries to influence the strength of the dollar through the official cash rate. Is the
cash rate in our country is high, then the comparison to other western countries can make our
dollar strong thus investors investing in our country put more money in our country. On the other
hand, strong dollar might be god for the importers but also bad fot the exporters. The stability of
the financial markets is also checked on their lending and their deposit accounts rates in
particular. Finally the last review is in regard to their previous decision on the cash rate effects
on the social banking. Additionally they will give the weighing on how consistence inflation is to
their projections as well as the future outlook to their growth. Upon the discussion of the above
macroeconomic indicators, a comparison is made mostly for the housing markets overseas, the
demands of the consumers and the performance of the currencies of countries with higher
growing economies such as China, The United States of America and also some of the larger
European countries like Japan among others. Comparing the two help the RBA see the effects
that might arise after raising, maintain or lowering the official cash rate. Thus comparing the two
economies makes the Reserve Bank of Australia learns in advance the effects that might arise
after deciding on whether to rise, maintain or lower the cash rate hence enabling them change the
cash rate in the favor of the nation of Australia (Rey, 2015).
Question 2: Explain the main objectives of monetary policy. List and describe the main
functions of money and the Reserve Bank of Australia.