Report on the speech "Today's Reduction in the Cash Rate" 2022

Running head: ECONOMICS
Report on the speech "Today's Reduction in the Cash Rate"
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1ECONOMICS
Executive summary
The monetary policy of Australia is controlled by the Reserve Bank of Australia. In the recent
times, RBA has reduced the cash rate to 0.75%, which is a historic low to achieve the target
inflation of 2 to 3% in the medium term. This move in the monetary policy is expected to boost
domestic demand production, increase in disposable income and increased level of spending. On
the other hand, fall in the interest rate discourages savings, deposits and investments by lowering
asset values. Investment in securities is expected to rise due to cut in cash rate. This report also
highlights the importance of leverage in the economy and money supply, along with an overview
of the ADIs, and Basel Accords. The discussion is primarily based on two articles, namely,
‘Today’s Reduction in the Cash Rate’, the speech by Philip Lowe, RBA Governor and ‘RBA
joins race to the bottom’, by Greber and Shapiro (2016).

2ECONOMICS
Table of Contents
1.0 Introduction................................................................................................................................3
2.0 Discussion..................................................................................................................................4
2.1 Role of RBA in implementing monetary policy....................................................................4
2.2 Current economic environment (inflation and interest rates) of Australia and effects of
monetary policies on financial markets including asset values and yields..................................5
2.3 Importance of leverage..........................................................................................................7
2.4 Impact of monetary policy on securities values, individual’s personal savings accounts,
investment in superannuation and/or managed fund investments...............................................8
2.5 Functionalities of Authorised Deposit Institutions (ADIs) and role of Basel accord ii, iii or
iv (proposed) in dealing with capital and liquidity risks in Australia..........................................9
3.0 Conclusion...............................................................................................................................10
References......................................................................................................................................12

3ECONOMICS
1.0 Introduction
The economy of Australia is controlled by its central bank, that is, Reserve Bank of
Australia (RBA), similar to any other economies of the world. RBA controls the economy
through monetary and fiscal policies that influence the interest rates, inflation rates and all other
economic variables and environment. The country has experienced a positive economic growth
for more than two decades (Cornish 2016). However, the Australian economy has not achieved a
good inflation rate in the recent years, which has been affecting the employment level and
growth of the income. Hence, RBA slashed the cash rate by historic low of 0.75% basis points in
August after 2.5 years to stimulate the economic growth and reach the target inflation rate of
more than 2% (Nguyen and Wang 2019). There are significant implications of lowering the cash
rate in the economy and the RBA targeted to achieve the medium term for a sustainable
economic growth. This report presents an in-depth discussion on the incidence of interest rate cut
by the RBA and its influence on the existing economic environment, that is, interest and inflation
rates, role of RBA in implementing the monetary policies and its effect on security values,
individual’s personal savings accounts, investment in superannuation and/or managed fund
investments. It will also discuss Authorized Deposit Institutions’ (ADI) role in dealing with the
liquidity, credit, operating and interest rate risks in Australia and some other macroeconomic
phenomena in detailed manner on the basis of two articles, firstly, the speech by the RBA
Governor, Dr. Philip Lowe on the cash rate cut, ‘Today’s Reduction in the Cash Rate’, and
secondly, the article, ‘RBA joins race to the bottom’, by Greber and Shapiro (2016).