MAF202 Money and Capital Markets Assignment T1 2012 Essay

MAF202 Money and Capital Markets Assignment T1 2012 - Essay Example Hence, there has been widening of spread between cash rate and the interest rates set by the major banks. Banks have argued to such anomaly by mentioning that the rising costs of funds have led them to take such decisions. Since the Global Financial Crisis (GFC), banks have relied more on debt funding which are expensive sources of fund than equity and others. If we look at the recent global economic scenario, it can be found that the euro-zone crisis situation is still unresolved, and economic growth rate is expected to slowdown in 2012. There have been no rate cuts by the central bank of UK since 2009. In India recently there have been rate cuts by Reserve Bank of India and banks have started responding to it positively. Central bank of China follows a tightly regulated monetary policy and is expected to have rate cuts in 2012. Reserve Bank of Australia (RBA) is the central bank of Australia established in the year 2006. Its principal task is to control and regulate the monetary policy of Australia (Reserve Bank of Australia, 2012a). RBA uses cash rate as a tool to control the pressure of inflation in Australia. RBA targets to keep the inflation rate in and around 2% to 3%. This refers to the monetary policy followed by RBA. RBA’s monetary policy also includes curbing unemployment rate and assuring a stable economic growth of the country as its other objectives. When the inflation rate goes beyond the target of RBA, the cash rate is enhanced. Otherwise RBA tries to reduce the cash rate when it feels that inflation is not posing a great threat and Australia can have a faster economic growth. RBA regulates the monetary policy of Australia by setting up the lending rates on loans available in the money market on an overnight basis. These rates of interest set by RBA have an influence on the rest of the interest rates in Australian economy. Subsequently it has an effect on how the