Free «Money and Capital Assignment» Essay Sample

The Reserve Bank of Australia determines the interbank interest rates of in the country.  This Reserve Bank puts the target cash rate.  The cash rate then becomes the market interest rate charged on overnight funds. The market interest rate is always used as an.  The cash rate can be defined as the interest rate paid by financial institution to either borrow or charge as the firms lend money in the financial market on an overnight basis. This paper seeks to look at the factors that Reserve Bank of Australia take into account when determining interbank interest rates?  This paper will take into account the decision taken by the Reserve Bank of Austrlalia in April 2012.  

The Reserve Bank of Australia has a more specific definition of the cash rate. The bank defines the cash rate as an operational target aimed at the implementation of financial policy. The Reserve Bank of Australia's uses the term cash rate concurrently with interbank overnight rate. The reserve bank refers to rates as the interests that banks pay or charge to have a loan of funds from or let to other banks borrow on an overnight unsecured basis. The cash rate or interbank overnight rate is calculated by the Reserve Bank of Australia on a daily basis. This is made possible through collection of this data directly from the bank. The reserve bank of Australia has been able to publish the data successfully and consistently from June 1998 to the present date.



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The information on cash rate is always released constituently by the Reserve Bank of Australia. According to the information released to the press on third April 2012 by the Reserve Bank of Australia Governor Glenn Stevens, during its meeting on Monetary Policy, the Board decided to hold the cash rate or interbank overnight unchanged at 4.25 per cent. There are many factors that influence interbank interest rates. Many of these factors are evident in the reserve bank of Australia report of 2012.

 The main factors that affect the interbank interest rates in Australia are the world market economy, unemployment rate and inflation. Other determinant factors for interbank interest rates include credit growth and labor market conditions. A case study of two different scenarios will help explain the fact in question. Studying the Reserve Bank of Australia reports of March 2012 and the April 2012 gives a clear indication of similarity in factors that affect interbank interest rates in Australia.  This is because both months had similar interbank interest rates of 4.25 percent.

The Reserve Bank of Australia reports of March 2012 indicate that the interbank interest rate was 4.25% which was same the report in April. The factors that led to the interbank interest rates were outlined. One of the factors was that the world economy was growing at a below- trend pace. The Australian economy had grown close to trend in overall but there was marked difference in growth of various sectors. Employment rate had increased during mid 2011 while labor market conditions softened.  Despite increase in interest rate for those borrowing, it remained close to the medium-term mean. The CPI inflation had also fallen. The credit growth remained modest as the prices of housing stabilized. In addition housing market remained soft during the period in question. There has also been a notable increase in exchange rates. However the terms of trade have declined.

Looking at the report of April 2012 by Glenn Stevens the governor of the Reserve Bank of Australia shows almost similar trends like the ones experienced in much the same year. This shows that the same factors that affected the interbank interest rates in March also affected the month of April. During his press release Glenn announced that the interbank interest rate remained at 4.25%. According to the report output growth was below the trend. However, a number of differences in the performance of various sectors were evident. This was attributed to the occurrence of structural changes. The Australian interbank interest rate therefore remained the same during the same period at 4.25% because the information obtained suggests that the world economic growth was below the market trend. This suggests that international market economy affects interbank interest rates.

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Another factor that influence of interbank interest rate in April was stabilization of borrowers’ interest rates. The interest rates remained close to their medium-term average. Inflation which affects the interbank interest rates remained between 2-3 percent as the earlier period. Moreover, growth in credit remained modest. The prices of housing have also considerably stabilized. From these case studies of the factors that affected the interbank interest rates between March 2012 and April the same year are almost the same. The values have also indicated the same interbank interest rates. This shows very clearly that the factors in question affect interbank interest rates.


We have defined interbank interest rates. The paper has also looked at the determinants of interbank interest rates. We have looked at several factors including inflation, the world economic condition, lending rates and employment amongst others. Furthermore, case studies of the March 2012 and April this year have served well to prove the fact that the outlined factors affect interbank interest rates in Australia. However, it is important to note that Despite the RBA lowering interest rates many times the commercial banks do not reduce their interest rates by a similar amount. This is because interbank interest rates vary from one lending institution to another with higher interest rates in higher interests in smaller banks. The interbank interest rates also depend on the relationship the bank has created with their customers.


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