On February 26, 2013, the Assistant Governor of the Reserve Bank of Australia, Guy Debelle, addressed a breakfast gathering at the University of Adelaide Business School. The topic of Debelle's address was that of how the central bank actually goes about implementing interest changes and how those changes impact on the Australian economy through deposit and loan rates and the exchange rate.
FNArena believes many readers will be interested in this topic and keen to know just how much publicised, but often little understood, RBA cash rate changes really work.
An address by Guy Debelle, Assistant Governor, Reserve Bank of Australia
Why might you be interested in this topic?
I will talk about how the Reserve Bank actually implements the target interest rate set by the Reserve Bank Board at its monthly meetings. I will then describe how this interest rate, known as the cash rate, affects all the other interest rates in the economy, including mortgage rates, business borrowing rates and deposit rates. So that affects you one way or another.
I will also talk about the Reserve Bank's transactions in the foreign exchange market and finish with some thoughts about the exchange rate more generally.
Domestic Market Operations
As you all know, on the first Tuesday of each month (except January), the Board of the Reserve Bank meets to determine the appropriate stance of monetary policy in Australia. At 2.30 pm, just after the conclusion of the meeting, the Governor issues a press release announcing the Board's decision, along with an explanation for the decision taken. The decision takes the form of a target for the cash rate. It is the job of part of my area, Financial Markets Group, to ensure that the Board's target for the cash rate is actually achieved.
So how do we do this? And how does that affect the interest rate on your mortgage, your business loan and your deposit?
The cash rate is the interest rate on overnight unsecured borrowing in the interbank market. That is, it is the interest rate banks charge each other to borrow and lend funds overnight. (Unsecured means that there is no security, such as a government bond, tied up in the loan as collateral.) The Reserve Bank's ability to affect this interest rate comes from the fact that we control the amount of funds or liquidity in this market.
Banks have deposit accounts with the Reserve Bank called exchange settlement accounts. These are the accounts across which the myriad of transactions in the economy are settled each day. When you pay your electricity bill by direct debit, the funds are effectively transferred from your bank account, across the exchange settlement account of your bank to that of your electricity company's bank and into the electricity company's account.
These exchange settlement accounts at the Reserve Bank must always have positive balances. At the end of each day, the balance in these accounts is paid an interest rate of 25