With this increasing globalised world, and ramified changes in economic policies and measures monetary policies are used by nationalized authority to control the flow of money in particular countries. In this report, study has been prepared to analysis the economic policies and monetary policies used by Reserve bank of Australia for curbing the flow of cash and monetary money in open economic of Australia. This report reflects the role played by the Central Bank of Australia in a particular country and how it implements monetary policies in performing its responsibilities (Stevens, 2012). There are several methods which are used by Reserve Bank of Australia such as setting repo rate, standard reserve, bank rate and interest rate on the gilt securities issued. The key mandate of Reserve Bank of Australia is to regulate the financial system and maintain an effective cash flow. In this report, it is reflected that Reserve Bank of Australia has specific objective to maintain an appropriate legislative, regulatory and supervisory framework to govern the operations of all the persons licensed under its own mechanism (Pagan, and Wilcox, 2015).
This is evaluated hat each and every country has its separate central bank which is indulged in implementing monetary policies and imposing new rules and regulation in determined approach. The main functions of central bank is to control the nation’s money supply through active duties such as managing interest rates determining the requirement of least standard reserve in banks and establishment (Atkin and Connolly, 2013).
It is the Australian bank which conducts monetary policies and works to maintain effective and strong financial system and issue the nation’s currency. The main role of Australia is to maintain monetary policies banking policies in the best interest of general public. For instance, If Reserve bank of Australia finds that the inflation rate is going up beyond their limit then banks issues gilt securities or decrease the rate of interest with a view to control the flow of money in the market (Galí, 2015). There are other roles which played by Reserve bank of Australia such as stability of currency of Australia, maintained of full employment and economic prosperity and welfare of the people of Australia. With the increasing ramification of economic changes and enhancing complexity of business, central government of Australia indulged in promotion of overall stability of financial system, holding and management of foreign currency on domestic an international level , provide banking and financial services and the most important role is related to design, produces and issues Australia’s banknotes (Pack, et al). Furthermore, apart from these roles, Australian central government not only indulged in these activities of supporting economic but also provides proper collaboration to private financial banks. Nonetheless, due to the recent amendment to the Reserve Bank Act in 1988, Reserve Bank of Australia was given full responsibility for ensuring the stability of currency of Australia, maintained of full employment and economic prosperity and welfare of the people of Australia and free itself from controlling and supervision. These types of responsibilities are given to Reserve Bank of Australia to control the fluctuation in money supply and establish the value of money in the current economy. However, inflation rate and determining the purchasing power of currency are one of the major points which are controlled by Reserve Bank of Australia through their monetary and money policies (Manalo, Perera, and Rees, 2015). These policies are the used by Reserve Bank of Australia to make strengthening operating systems for banks and reducing the non performing assets in society. These are the assets which are shown in the assets side of banks and reflect the loan holder’s account who are not paying loan amount within the said deadline. These assets become burden on the operating functions of banks and pose high amount of risks to the operating functioning of organizations. The main role of Reserve Bank of Australia is to provide guidance and instructions to banks and financial institutions. Ideally in case of deficiency of money, these private banks and financial institutions take money from reserve bank of Australia (Kuttner, and Shim, 2016).
The Australian economic is the strongest economy among the most robust in the OECD. The current GDP of the Australia is 56327.72 USD which has rose by 2% as compared to last five year GDP rate. This level of increment in the current economic of Australia not only increases the inflation rate but also increase the purchasing power of economy. This level of changes could be observed by evaluating the current economic issues and other associated factors such as increase in the products and services price, strengthening the current economic policies. However, Australian economy is open and it allows other businessmen to make investment in Australian economy and set up their business. In addition to this, Reserve Bank of Australia indulged in maintaining effective banking policies which allows new start up business and other organizations to take up loans and other money from the private banks in easy and determined approach. On the other hand, current price index of company is also 3.1 % which is .5 % higher than its last year data. Furthermore, Australian economy is also open and providing several advantages to organizations such as entering into double entry avoidance tax agreement, setting up lower tax rate for business profit and providing various collaborations to organization. However, with the changes in economic policies and increasing GDP rate of Australia, it is observed that Reserve bank of Australia should increase its overall budget amount and standard leverage rate. This increased leverage risk expose the operating, financial and working capital risk of banks and financial institutions (Groenewegen,. and McFarlane, 2014).
The Reserve Bank of Australia is more inclined towards setting up new policies and laws. The financial leverage of Australian market is controlled and determined by the monetary policies and money policies set by Australia. For instance, if the value of money in market is declined then it should be curbed by the new policies and program set up by the Reserve Bank of Australia. The value of money in Australia market completely depends upon the budget issued by the central bank. IF Australian country is having high level of cash leverage in market then reserve bank of Australia will issues gilt securities, reducing the budget amount in the market and increasing the borrowing loan rate. These types of activities will not only reduce the cash leverage in market but also curb the decreasing value of Australian dollar due to inflation, reducing foreign exchange reserve and other associated domestic and international factors. However, Reserve Bank of Australia in collaboration with the BASEL formed rules and regulation have made several changes in monetary policies which result to reducing the overall risk of authorized deposit institutions and market associated risk (Rees, Smith, and Hall, 2016).
Leverage could be defined as strategically positioning of the value of money in the Australian market by maximizing the output. Therefore, it is evaluated that if price of the all the products increase due to its increasing cost and reducing value of Australian money in market then it should be curbed by using monetary policies and money laws and regulations. It is further observed that if this leverage is not maintained by Reserve Bank of Australia in significant time period then it will surely destruct the value of money in Australian market. However, fixing of interest rate and standardized capitalized reserve also put impact on the value of money in Australian market. If inflation rate is increasing and value of Australian dollar decreases then Reserve Bank of Australia will raise the interest rate and provide more return on the saving deposits (Bjørnland and Halvorsen, 2014).
The reserve bank of Australia governor thinks leverage is a good idea as it provides stability in the financial condition. Debt is always considered as a nominal contract. In the economy rate of price inflation always matters so that incentives can easily take on debts. If the price inflation is negative it is suggested that it can create problems for the borrowers and also include the sound ones. Moreover different average rates of inflation has a greater involvement of average nominal interests rates and also includes the several rates of decline of the repayment mortgage that are fixed (Galí and Gambetti, 2015). This mortgage sometimes called as tilt by the housing literature. However sometimes same repayment is translated into the several kinds of allowable loan size. This bank further explains that there are many occasions where disinflation which is permanent has some micro implications for the debts, assets values and also the distribution for both of them. The bank governor also thinks leverage is important as there are no perfect information on the ability and willingness to pay of the borrowers’. Most of the borrowers even don’t know about themselves as they will be able to pay in the future or not. In this situation some of the borrowers end up default their debts and the lenders have no idea that who can default them or who cannot. Credit constraints are generally pervasive and contain a series of forms (von Bohm-Bawerk, 2013).
Leverage is also considered important as there are many legal definitions of liability that differ in variety of conditions. And these differences have a huge impact and interplay between the debts, property and the financial stability. Most important difference here comes is that many companies have limited liability and individual do not have limited liability. This further can help as recovery of lenders can be done and can also expect from the borrowers who had made default earlier. It is also recognized that an individual who is bankrupt can continue to earn their income afterwards but the company that has made default can be bankrupt and later can exist from the market. The variety of properties that company owns can further pose several kinds of risks to the individuals that own them (Neely, 2015).
The governor of bank also thinks leverage is important as the properties have got a permission to be leveraged more than the assets like any other equities. Leverage assets are not the only mean through which a borrower can pay the loan. Moreover there is an income stream that serves the debt which can be considered as the rental income on the property. The property can be kept as security if the borrowers are not able to pay the loan or makes any default.
Hence leverage is an important part that helps in providing the financial stability and also helps the borrowers to pay their loans in any kind of default that is made by them. Due to this lenders can also get a sigh of relief and can mostly be dependent on the borrowers. Reserve banks of Australia not the governing authority but also provides wide range of budgetary implications such as setting repo rate, standard reserve, bank rate and interest rate on the gilt securities and other required measure. It is further observed that if Australian economy is having high leverage in its economic process system then it reserve bank of Australia will strengthen its monetary and fiscal policies and vice-versa (Bernholz, 2015).
Authorized deposit institutions are an Australian government term for corporations who are engaged in management of deposits and other banking activities. It not only includes banks, financial institutions but also corporate society and credit unions that are indulged in banking and financial activities. (Fenna, 2013). This Authorized deposit institutions use interest rate to control the money supply and value of money in the Australian market. For instance, these banks and Authorized deposit institutions set up high interest rate when it do not want to see the flow of money supply in the market due to its decreasing trend of value of money in the market and reduce the offered interest rate to borrowers when it wants to see the flow of money in the Australian economy (Bech, Gambacorta and Kharroubi, 2014). However the changes in interest rate offered by these Authorized deposit institutions are totally depends upon the other rates determined by the Reserve bank of Australia. Ideally, interest rate in Australian economy is divided into two specific pars namely traded interest rate and split interest rate. Traded interest rate is fixed by the only by those Authorized deposit institutions who are indulged in trading activities of other organizations. Many of the Authorized deposit institutions use number of techniques to measure the interest rate risk in their value chain process such as interest earning method and cash flow method. Risk of interest rate in Authorized deposit institution could be determined on the basis of receipt and cash outflow of money. With the new amendment in BASEL rules and regulations, all the banks and financial institutions has to manage an effective level of liquidity coverage ratio which reflects banks ability to pay off its short term and long term debts. All the banks and Authorized deposit institutions needs to manage high capitalization in its value chain activities which not only increase the leverage of banks but also reduce the liquidity risk. In addition to this, operating risk of banks also managed by Authorized deposit institutions by following proper level of new rules and regulation of Basel. This reflects how much interest rate these Authorized deposit institutions should charge from clients and how much capital amount banks should hold in their depository account. Interest rate risk is the most common to arise when Authorized deposit institutions provide high number of loans to borrowers and have low level of capitalization in their reserve account. It is observed that if proper level of regulation and minimum standardized followed by banks and Authorized deposit institutions as per the set requirement of Basel then it would surly decrease the operating and financial risk in determined approach (Plumb, Kent, and Bishop, 2013).
Conclusion
The Central Bank of Australia in a particular country uses various methods such as setting repo rate, standard reserve, bank rate and interest rate on the gilt securities issued. These methods are used to control the value of money in the market. However, these all methods are the part of monetary policies which are used by Central Bank of Australia to manage the value of money in the market. In this report, learning has been done on the several parts of Central Bank of Australia’s working system and how it implement monetary policies in Australian economy. However, changes in monetary policies are accompanied with complex set of regulations and procedural requirement. There are several number of measures of underlying inflation which could be used by reserve bank of Australian in its monetary policies such as reducing the overall budget amount of country and increasing the tax implication on products and services in Australia.
References
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