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| Date |
Percentage point change |
Cash rate target (%) |
|
|---|---|---|---|
| 23-Jan-90 |
-0.5 to -1.0 |
17.00 to 17.50 |
|
| 15-Feb-90 |
-0.50 |
16.50 to 17.00 |
|
| 04-Apr-90 |
-1.0 to -1.5 |
15.00 to 15.50 |
|
| 02-Aug-90 |
-1.00 |
14.00 |
|
| 15-Oct-90 |
-1.00 |
13.00 |
|
| 18-Dec-90 |
-1.00 |
12.00 |
|
| 04-Apr-91 |
-0.50 |
11.50 |
|
| 16-May-91 |
-1.00 |
10.50 |
|
| 03-Sep-91 |
-1.00 |
9.50 |
|
| 06-Nov |
-1.00 |
8.50 |
|
| 08-Jan-92 |
-1.00 |
7.50 |
|
| 06-May-92 |
-1.00 |
6.50 |
|
| 08-Jul-92 |
-0.75 |
5.75 |
|
| 23-Mar-93 |
-0.50 |
5.25 |
|
| 30-Jul-93 |
-0.50 |
4.75 |
|
| 17-Aug-94 |
0.75 |
5.50 |
|
| 24-Oct-94 |
1.00 |
6.50 |
|
| 14-Dec-94 |
1.00 |
7.50 |
|
| 31-Jul-96 |
-0.50 |
7.00 |
|
| 06-Nov-96 |
-0.50 |
6.50 |
|
| 11-Dec-96 |
-0.50 |
6.00 |
|
| 23-May-97 |
-0.50 |
5.50 |
|
| 30-Jul-97 |
-0.50 |
5.00 |
|
| Source: Reserve Bank of Australia Bulletin, November 1997. | |||
The Money Market
The money market is where the banks trade in securities in order to maintain their day-to-day liquidity with short-term overnight loans. The banks hold Exchange Settlement Accounts (ESA) with the RBA. ESAs are where the banks settle obligations amongst themselves and with the RBA. The ESAs must be kept in credit at all times. Some banks may need to borrow to cover any shortfalls in their accounts and others may wish to lend any surpluses they may have. They do this by buying or selling short-term securities in the financial markets.
The RBA is the only authority that can change the level of funds in the ESAs. It does so by buying or selling short-term securities in the financial markets. These operations enable it to effectively influence interest rates in the money market. To increase the liquidity of the financial system the RBA will buy short dated Commonwealth Government securities and repurchase agreements, or 'repos' as they are known ('repo' is an agreement whereby the RBA agrees to buy/sell and resell/repurchase a security at a set date at an agreed price). If the RBA supplies more funds than the banks wish to hold the banks will try to shed funds by lending more to the money market, resulting in a tendency for the cash rate to fall. This process can be reversed by the RBA providing less funds than the banks require. Thus, through its control of the amount of funds in the ESAs the RBA is able to determine the cash rate.
Every morning at 9.30 the RBA informs the market whether or not it expects ESA funds to rise or fall that day and whether it intends to buy, sell or not operate in the market. Once the RBA has completed its dealing (usually by 10.15am) the banks and other financial intermediaries negotiate the rate of interest they are willing to pay on their overnight loans to each other. These overnight loans are on call until 11am. This means that they can be withdrawn or renegotiated without notice by the lender up until 11am each day. These loans are renegotiable on a daily basis.
The availability of the overnight loans are heavily dependent on the operations of the RBA which means that 11am call rate usually stays close to the RBA's announced target for the overnight cash rate; at present this is 5 per cent. The RBA operates on the overnight rate as the key monetary policy instrument because it effectively controls the supply of funds to ESAs and hence their price. This rate has a major influence on the interest rates that the banks and other financial intermediaries charge their customers e.g. for housing and business loans.
Conduct of Policy
During the 1980's there were no formal announcements on monetary policy. This changed in 1990 with the first public announcement on policy. On 23 January 1990, the Governor of the RBA announced that the Bank had operated in the market to reduce the cash rate by a half to one percentage point and gave reasons why he felt this necessary. Since then every time the policy has been changed the Governor has made a similar public announcement. This more transparent approach is designed to reduce any confusion about the RBA's policy intentions. This and other measures, such as the announcement of an inflation target, are designed to set the economic climate and influence the decisions of other players in the economy. While the cash rate is determined on a daily basis by the interaction of supply and demand the RBA's practice of announcing a target rate has a strong influence in keeping the cash rate close to the desired level. Market participants now operate on the assumption that the RBA will inject funds if the rate moves above the target rate and withdraw funds if it falls below it.
