WEEK 5
Financial Markets
Financial Aggregates
You will learn about:
Financial aggregates measured by the Reserve Bank of Australia
• currency
• broad money
• credit
Interest rates
• types of rates in the short term and long term
– lending rates
– borrowing rates
You will learn to:
Examine economic issues
Financial aggregates measured by the Reserve Bank of Australia
• currency
• broad money
• credit
Interest rates
• types of rates in the short term and long term
– lending rates
– borrowing rates
You will learn to:
Examine economic issues
- examine the contribution of financial markets to the economic welfare of individuals and firms
- analyse the factors that influence the level of interest rates
- predict trends in interest rates in hypothetical situations.
What are financial aggregates?
Currency is notes and coins on issue less holdings of notes and coins by all banks and the Reserve Bank.
M1 is currency plus current deposits with banks.
(M2 includes "near money", such as cheques and other exchange mediums that are like money).
M3 is M1 plus other deposits from building societies and credit unions with banks.
Broad money is M3 plus borrowings from the private sector by non-bank depository corporations less holdings of currency and deposits of non-bank depository corporations.
Credit is loans, advances and bills discounted to the private sector (it does not include loans to other financial intermediaries).
These definitions come from the Australian Bureau of Statistics.
M1 is currency plus current deposits with banks.
(M2 includes "near money", such as cheques and other exchange mediums that are like money).
M3 is M1 plus other deposits from building societies and credit unions with banks.
Broad money is M3 plus borrowings from the private sector by non-bank depository corporations less holdings of currency and deposits of non-bank depository corporations.
Credit is loans, advances and bills discounted to the private sector (it does not include loans to other financial intermediaries).
These definitions come from the Australian Bureau of Statistics.
What are interest rates and why are they important?
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Interest rates are the cost of borrowing money and the reward for investing money.
| activity-the-transmission-mechanism.pdf |
What influences interest rates?
This information comes from the RBA's "Banks' Funding Costs and Lending Rates". You can download the full explainer here:
| banks-funding-costs-and-lending-rates.pdf |
Banks’ Funding Costs and Lending Rates
The interest rates that banks charge borrowers and pay to savers influence the decisions of businesses and households about how much they want to borrow or save. To fully understand the transmission of monetary policy, it is important to understand what banks’ funding costs and lending rates are, and what influences them.
From the perspective of a bank:
• funding costs are the interest rates paid to savers
• lending rates are the interest rates paid by borrowers.
• funding costs are the interest rates paid to savers
• lending rates are the interest rates paid by borrowers.
What Influences Banks' Funding Costs?
- The cash rate
- Market reference rates
- Deposit rates
- Other monetary policy tools
The Cash Rate
The cash rate has an important role in determining the interest rates on banks’ funding sources.
However, the interest rates banks pay for different sources of funding don’t necessarily move by the same amount or at the same speed as a change in the cash rate.
However, the interest rates banks pay for different sources of funding don’t necessarily move by the same amount or at the same speed as a change in the cash rate.
Market Reference Rates
Market reference rates are based on transactions between participants in a financial market that happen often enough to reliably measure these rates.
Deposit Rates
Deposit rates are less directly influenced by the cash rate and changes to the cash rate also tend to take some time to be transmitted to deposit rates.
Other Monetary Tools
Unconventional monetary policy occurs when tools other than changing a policy interest rate are used. These tools include:
- forward guidance
- asset purchases
- term funding facilities
- adjustments to market operations
- negative interest rates.
What Influences Banks' Lending Rates?
- Banks' funding costs
- Competition for borrowers
- The risk that borrowers do not repay their loans
Everything is connected.
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Interest rates are directly affected by monetary policy decisions made by the RBA. The RBA in deciding on whether to increase, decrease or to leave the cash rate unchanged considers the wider economy, especially factors affecting employment and price stability.
To fully understand interest rates, we need to understand what is happening in the economy. |
Using this resource, complete the activities in the booklet (available as a download below) to understand what key events are effecting economic metrics such as unemployment and inflation.
| current_issue_-_corona_virus_booklet.docx |
Photo used under Creative Commons from OzAmit
