The RBA Board considers whether to change ‘the cash rate’ on the first Tuesday of every month, except January.
a) What is ‘the cash rate’? Who is lending to whom, and for how long?
b) What is the most important mechanism used by the RBA to ensure that the cash rate remains at the RBA’s desired level, from day to day? Specifically, if there is an expected shortage of liquidity in the commercial banking system tomorrow, how will the RBA prevent the cash rate from increasing?
c) What is the RBA’s target for consumer price inflation?
d) If the RBA Board is concerned that inflation will remain below its target for a long period of time, it is likely the RBA Board would react. What would you expected the RBA Board to do, under these circumstances?
e) In the USA, Japan, the European Union and the UK, official interest rates have been close to zero, and central banks have reacted by using ‘quantitative easing’. What is quantitative easing? How might quantitative easing work, to stimulate demand and add to inflation? (Tip: refer to the Bank of England video on our web site. Do not refer to random posts you have found on the internet.)
f) Despite being undertaken on a very large scale, it appears that quantitative easing has had at best a marginal impact on these economies. It used to be thought that official interest rates had a ‘zero bound’, and would never be set at negative levels. However, both the Bank of Japan and the European Central Bank have reacted to the failure of QE by setting their official interest rates at negative levels. In Japan, an official rate has recently been set at -0.1% and in the Eurozone at -0.4%. What are these interest rates, and exactly what does it mean to say that they are negative?