Wednesday, 16 February 2011

The Bank of Australia's base rates

 Bank of Australia base rate data

The ozzie central bankers must be in line for some sort of award, despite a domestic house price crash they've stood firm and maintained interest rates at near normal levels throughout the recession, astonishingly IRs are now trending upwards. Maybe if we asked them nicely they could pop over and let King et al know how a real central bank is run, i.e a bank that honours it's liabilities instead of attempting to inflate away all our financial problems.

Here's what the BofA has to say about it's monetary policy:  "Monetary policy decisions are expressed in terms of a target for the cash rate, which is the overnight money market interest rate."

And here's the technical bit: "From day to day, the Bank’s Domestic Markets Department has the task of maintaining conditions in the money market so as to keep the cash rate at or near an operating target decided by the Board. The cash rate is the rate charged on overnight loans between financial intermediaries.... The Reserve Bank uses its domestic market operations (sometimes called ‘open market operations’) to keep the cash rate as close as possible to the target set by the Board, by managing the supply of funds available to banks in the money market"

You can find more, here

To use an analogy, the banks are like dairy farmers and the central bank is like a mega-farm. The dairy farmers set prices in the marketplace but if the mega-farm is unhappy with those prices they either flood the market with milk or restrict their own output until a target price is achieved. The ebb and flow of these transactions make up most central banking activites, it's only when there's a major crisis do they tend to become more involved.

1 comment:

  1. I've added you to my second blogroll, for what it's worth.