Transmission of Monetary Policies by RBA

Running head: TRANSMISSION OF MONETARY POLICIES BY RBA 1
Transmission of Monetary Policies by RBA
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TRANSMISSION OF MONETARY POLICIES BY RBA 2
Reasons Why the Interest Rates and the Exchange Rates Change Over Time
Inflation has a negative implication on the value of a currency and the exchange rates.
For that reason, the RBA board hold sessions to evaluate the changes in financial policies in
Australia. High rates of inflation are likely to negatively impact the exchange rates in Australia.
Interest rates are highly related to inflation rates because both influence the exchange rates. The
RBA is charged with the responsibility of balancing the inflation rate, the exchange rates, and the
interest rates but the connection between the three is complex making the balancing difficult to
accomplish (Ghosh et al, 2016).
The main reason for an increase in inflation in Australia is due to an increase in spending.
High inflation results to hiking of prices for commodities within the economy making the
exchange rates for the country to be very poor as compared to currencies of other countries
(Atkin et al, 2017). To maintain inflation to standard levels, the RBA has to employ the
contractionary policy with the goal of reducing cash flow within the economy by increasing the
interest rates and reducing the bond prices. This result in a reduction in spending because the
cash availability has been decreased.
The concept of purchasing power parity requires that the exchange rates amongst two
nations to varying so as to balance the purchasing powers between the two countries. If one
country is experiencing a higher inflation as compared to its partner, its exchange rates will
appear to depreciate to overcome a continuous deficit of competitiveness. The effects of financial
policies can also be displayed practically. Statistics suggest that reducing cash tariffs by 100
source point results to financial activity, with GDP being ½% to ¾% advanced than else it could
have been in a period of two years (Borio et al, 2017). The inflation rate normally increases by