Monetary Policy
Money is the set of the assets in a given economy with which people regularly use in buying of goods and services from one another. It has three functions store of value, measure of value, and a commodity for exchange. Money has liquidity as one of its functions. Liquidity is the given ease at which any given asset will be converted into a medium of exchange in a given economy. Commodity money takes that form of a given commodity with a given intrinsic. Examples here include gold, silver, and cigarettes. Fiat money is used as money because of the governments decree and lacks an intrinsic value. Examples include coins, currency, and check deposits.
The Federal Reserve (Fed) in Australia has been serving as the nations central bank. It has been designed to oversee the banking system and at the same time regulate the quantity of money circulating in the countrys economy. Regulates banks to ensure they follow federal laws intended to promote safe and sound banking practices. The Fed acts as the bankers bank which makes loans to the banks and always lender of last resort. It also conducts monetary policy by giving controls on the supply of money.
The Federal Open Market Committee, FOMC, is made up of these voting members One, the chairman and some other six members from the Board of Governors, the president of the Federal Reserve Bank of Australia, and the presidents of the other regional Federal Reserve banks. Monetary policy is usually conducted by the Federal Open Market Committee. Money supply refers to that quantity of money made available in the economy. Monetary policy on the other hand is the setting of the money supply by the policy-makers at the Central Bank.
The Australian Economic and Monetary System have always required that there should be no minimum money reserves within its banks, unlike in the United States and other global economies. Looking at the countrys framework of its Monetary Policy, it is based on a centerpiece aimed in tackling inflation in the economy, and here the Reserve Bank have been required to set a policy which would be applied in achieving a lesser inflation percentage of not more that 3 percent (Robert, 2003). The idea here is that, on average, an inflation rate in the economy that is sufficiently low will not in any way affect the economy materially, or even in the decision making strategies. This target of lowering the inflation rates has been known to provide a discipline in which the Monetary Policy will be used in influencing decision-making. This policy has also been speculated to serve as the main anchor or tool for lowering the inflation rates within the private sector economies (Stefano, 2008). In order to ensure that such a target is met between the period of September 2008 and December 2009, there has been an agreement between the Central Bank and the Australian Government.
Monetary Policy of Australia
The period between September 2008 and December 2009 has seen the Reserve Bank of Australia, RBA, coming up with the Australian Monetary Policy which would be used to drive the economy into its proper direction. This has been revolving around the interest rates and the reserve ratios. The Reserve bank of Australia, RBA, has achieved this by increasing the interest rates by about 0.25 percent for every consecutive third month. This would mean that the present interest rates would be standing at 3.75 percent (Robert, 2003). Although such a decision by the RBA never came as a surprise, the move had been forecasted by some twenty economists in the country. The other thing is that such a policy had been greatly criticized by the Chief Executive, Ridout Heather, of the Australian Industry Group. The CEO, Chief Executive Officer, said to Bloomberg News in an interview that the bank should have waited until all the economical signs had been clear so that it can be easy to project such economical developments and advancements (Stefano, 2008).
According to some economic experts, the major prospects in the ongoing economy expansions within the private demands have been necessary for the nation. This has brought about much strength for all the business investors and corporate industries. The country has also been able to note a number positive early signs towards the labor market improvement and the general market conditions. This has been brought about by the practicing of open market operations within the economies of the country (Mattsson, 2005). Presently, there has been an increasing trend in the employment opportunities in the country. Although such signs have been good, there are still a number of worries that the unemployment scenarios would be high as time goes by. Some experts have also noted that there is a possibility of the countrys exchange rates to rise within the end of this last quarter. Also, there are some fears that some of the global inflations may have to affect the inflation rates and economic growth within the next few months (Robert, 2003).
Generally, the Monetary Policy would be useful and applicable in increasing and advancing the sustainability as well as economic growth activities. This would ensure that the inflation rates are in consistent per the expected percentage targets within the next years ahead (Mattsson, 2005). After seeing the interest rates increase within the third quarter of the period, the Reserve Bank of Australia will have to wait for a few months then be able to take necessary harsh measures for tightening the economic strategies and on the existing monetary policies. This will ensure that the recent interest rates are increased as time goes by. This way the country will be able to meet the requirements of a real economic power. After putting in place all these strategies in the country, there have been a number of positive developments such as increased employment which has increased by 25 thousand employees in the first half of the period. The increased rates have also been applied to increase revenue which would then be used for economic developments. As experts say, the inflation rates are likely to remain as low as possible, and this is due to the capacity utilization mechanism that have been kept as low as possible. The final result here is that the interest rates will continue to rise even after the time bracket has elapsed, that is after December 2009.
Central Bank Implementations
With the Banks operations, reserves are deposits that banks have received but have not loaned out. In a fractional-reserve system of banking, banks tend to hold a fraction of the money deposited as a reserve while lend out the rest. When a bank makes a loan from its reserves, the money supply will increase. The money supply is therefore affected by the amount deposited in banks and the amount that banks loan. Deposits into a given bank are usually recorded as either assets and liabilities. The fraction for the total depositions that a bank has kept as reserves is known as the reserve ratio. These loans will become an asset to the bank.
Money Multiplier This is the amount of money the banking system has to generate with each value of reserves. The Australian Central Bank has been able to implement a number of changes to the monetary supply within the countrys economy. This has been achieved through the application of open market operations. Looking at any international Monetary Policy, we will note that it is any set or operations which lie in the terms through which a given economy give operational targets. Such targets determine the cash flow rates within the economy dynamics (Ekins, 2000). Such monetary policies will develop strategies on which interest rates are imposed on all overnight loans transacted between a number of institutions within the market and the circulating monies.
In order to achieve this, the Reserve Bank Board has the mandate to decide what changes are necessary in the Monetary Policies. This should also specify the new targets to be applied in the cash rates (Mattsson, 2005).This decision reached at will be applied in reflecting the required targets in the cash rates. Alternatively a decision aimed in tightening the Monetary Policy is the one which reflects the realisation of a high level target level in the cash rates. Once such a decision has been arrived at by the Reserve Bank Board, it will be able to set up new targets for the economies cash rates. Such rates will then be required to be announced by the government media release. This will give a details explanation why it was necessary to arrive at such a decision. Any change following will also be required to be announced in the press release (Adams, 2006). Such a release will give information on the new arrived cash rate target.The media release should be distributed in form of electronic services on that very day in which such a change has taken effect. Looking at the Monetary Policy changes in Australia within this period, the countrys Reserve Bank has been using its domestic open market and market operations. These are wholly referred to as the Open Market Operations. Such operations have been noted to be very effective in influencing the cash rates in the country (Adams, 2006).
When the countrys existing Monetary Policy has to be changed, all the market operations have to be aimed in moving all the cash rates to a given target level, either high or low. Between these changes in the Monetary Policies, the major focus on the market operations. Such operations would be necessary in keeping the cash rate as close as possible to the required target (Benjamin, 2009). Because these operations are basically used in the management and supply of the available funds in the banks and the money market, there are therefore referred as Liquidity Management (Anderson, 2009).
Open Market Operations
Open-Market Operations have been used to increase the money supply, and here the Fed buys the government bonds from the people. In order to decrease the money supply, the Fed sells government bonds to the public. This has been the major strategy which has been applied by the Central Bank in bringing about the Monetary Policy. Here, the cash rate has always been determined within the money market. Such a determination is always based on the dynamics existing from the interaction of supply and demand for the overnight transaction funds (Adams, 2006). The Reserve Central Bank has the ability of pursuing the necessary target for any terms for cash rate. This makes the bank able to have dominion on the funds supplies which are used by the major banks in settling down the transactions existing amongst themselves (Anderson, 2009).This hence brings about the settlement exchange funds. The Reserve Bank therefore ensures that the banks keep some funds with it. This hence satisfies the Monetary Policy targets.
The other strategy applied by the Bank is to monitor the market conditions in the first day of the policy. If the conditions come out differently as expected, the bank has the mandate to re-enter into the market and take control of the dealing (Brian, 2004).As the day ends, the banks can borrow money at a cost rate of 25 points. These are points above the normal target within the cash rate (David, 2009). These funds are known as the Exchange Settlements, and are paid with an interest rate of 25 points below the stated cash rate (David, 2009).There is also the Real-Time Gross Settlement strategy system (Brian, 2004). In this system, all the banks can have proper management of their liquidity, and this will be achieved by the use of a repo facility. This intra-day repo is available for such banks free of charge. The bank also ensures that all the settlement risks that may occur are eliminated so that the Reserve Bank is not put at risk should a given bank withdraw its participation or fails in its operations.
Monetary Policy and Debt Management
It would be necessary that any stated Monetary Policy is capable of maintaining and handling any debts incurred by the countrys economy. Any sound financial policy will be required to see that the Government has fully funded the budget and ensuring that there are genuine securities for any kind of deficit that may occur (Hirsch, 2001). It should also be necessary that the private sector enterprises do not borrow funds from the Central Reserve Bank. Presently, a number of nations have come up with legislations which deliver similar outcomes. With Australia, this has been achieved effectively through the agreement that has been made between the Reserve Bank and the countrys Treasury. Such an arrangement ensures that Monetary Policy by the bank is entirely out of question for any matters to do with Governments debts and their management. This means that the Treasury will directly be responsible for such debts. This makes the Central Bank responsible for the policy only and not for the countrys debts.
It will also be necessary to note that it cannot be easy to have all the deficits in the budget being matched exactly day-after-day with regard to all the issues of markets security.This is because such issues arise in weekly basis only and not on daily basis. So that it can be easy to overcome such mismatches between the daily expenditures and financing, the Government Treasury ensures that it keeps enough cash reserves in the Reserve Bank. Such fund balances are used to buffer the economy when the time comes (Hirsch, 2001). The Central Bank of Australia is also known to provide overdraft facilities that are used by the Government in covering periods of unexpected huge cash deficits. Through the application of such measures, the Central bank has been able to monitor money supply within the countrys economy. This ensures that necessary precautions are put in place for necessary economic achievements.
Another strategy applied by the Fed is the Changing the Reserve Requirement. The reserve requirement is the percentage amount of a banks total reserves not loaned out. There is the increasing of the reserve requirement which decreases the amount of money in supply. The decreasing of the reserve requirement will thus increase the money supply. There is also the Changing of the Reserve Requirement. The reserve requirement is the total amount of a banks total percentage reserves that cannot be loaned out. Increase in the reserve requirement will decrease the money supply. Decrease in the reserve requirement will therefore increase the money supply. Fed also operates by the Changing the Discount Rate. The discount rate is that interest rate which Fed charges any bank for loans received. An increase in the discount rate will definitely decrease the money supply. Any decrease of the discount rate will increase the money supply (Ekins, 2000).
Reasons behind these Changes
There were quite a number of reasons why this country came up with these changes so that they could bring about necessary impacts on the economy. Looking at such changes in the monetary operations, it will be seen that the country had been experiencing an alarming increase in inflation. This meant that, if unchecked, the country would be plunged into a big economic disaster. It was therefore necessary to come up with necessary implementations which would ensure that the inflation rates had been brought down (Stefano, 2008). Once such inflations had been dealt with, the next thing would be to see the currency exchange rate improving. This would bring about economic advancements.
There was also the need to come up with a pact for binding the government, the treasury and the central bank in controlling the monetary circulation in the country. This would ensure that a low cash rate would be realized from the existing high cash rate which seemed to threaten the countrys economy (Anderson, 2009). It was also necessary to put in place a proper decision making tool or policy which would control the private sector business as one of the major factors and players behind the countrys economy. Such a control on all private businesses would be necessary if the required inflation percentage were to be realized.
The other important aim for these changes was to drive the economy into its proper direction. This would be achieved by ensuring that the Central Bank would not be responsible for any debts of the government. This meant that the Treasury would be responsible for such debts. This way the Bank would be left with one duty of checking inflation rates and ensuring that all the necessary measures in open market operations were in the right track to enhance economic development. There was also the need to ensure that necessary measures were put in place to monitor transactions and dealings amongst the banks in the country (Stefano, 2008). This required all the banks to deposit a 25 point amount with the Reserve bank so that the bank would not loose or be affected by the failure in any of the banks operations. Having seen the above, we will agree that such a policy would touch the major corners or factors of the economy, thereby providing a benchmark for economic development. This would create a sense of security within business operations, and the final result would be realization of economic sustainability in the stated period, that is before December 30th 2009.
Generally, these changes would have necessary impacts on the entire economy of Australia. As we have noted, a number of experts have been projecting a reduction in the unemployment rates within, before the period ends. This will be caused by the willingness for a number of people to invest in the promising economy of the country (Stefano, 2008). This will be applicable as a major tool that will fuel the economy. Also, the presence of minimal reserve amounts in the Reserve Bank has been a key strategy that ensures that almost all the funds are used in economic developments. The presence of security in the banks operations has also been playing a major role in improving the countrys economy. The economy of Australia is supported by trading industry. This is so because even all the manufacturing industries produce goods that are put into the market for trading. This is why the Central Bank has been there to apply the Open Market Operations to bring the necessary changes in the money demand and supply (Ekins, 2000). This means that the economy can achieve equilibrium in funds and market trading.
The period for this policy has almost ended, but the necessary aims have been achieved from this Monetary Policy. In conclusion, the Australian Monetary Policy has been a useful tool which has seen the economy increase and advance in terms of its sustainability. This has brought about necessary mechanisms for driving the economy to the positive. This plan has ensured that the inflation rates have been brought down. After seeing the interest rates increase for the first quarter of the period, there were some conjectures that the policy was a total failure, but later positive developments started to emerge slowly by slowly. This has ensured that the interest rates have been increasing to increase the countrys revenue. After putting in place all the necessary strategies in the country, it is inarguable that there are a number of developments which have been recorded in the economy. There have been increased employments, reduction in inflation rates, and control of open market operations (Stefano, 2008). This means that the Australian Monetary Policy has not at all been a failure, but a stepping stone to a better economic performance.