Monetary Policy (MP) is a macroeconomic policy conducted by the RBA where supply & cost of money is influenced by changing the level of interest rates to achieve their objectives: economic prosperity and welfare of Australians; maintenance of full employment; stability of the Australian currency. The main instrument of MP is domestic market operations [DMO](buying or selling second-hand Commonwealth Government securities and Repurchase agreements) to impact the cash rate [currently at 2.75%], which is the benchmark interest rate and is able to influence interest rates across the economy.
Using DMO’s, RBA can implement the tightening of monetary policy; to reduce inflationary pressure and the level of economic activity; or the loosening of monetary policy; to boost aggregate demand and the level of economic activity.
Tightening monetary policy (act to increase the cash rate) includes the selling of old commonwealth government securities (Treasury notes & Treasury bonds) and Repurchase Agreements at a profitable rate to banks, reducing the supply of loanable funds in the Exchange Settlement Accounts (compulsory accounts held with RBA to settle debts between themselves). This puts upward pressure on the cash rate as seen in the diagram.
Alternatively, to loosen (act to reduce cash rate) MP the government buys old commonwealth government securities and Repos at a high interest rate, increasing supply of loanable funds, thus putting downward pressure on the cash rate.
In order to “top up” funds, the bank increase their interest rates to encourage individuals to deposit money and thus the changes in cash rate are fed through the economy with interest rate changes to influence the economy (transmission mechanism).
Tightening MP would involve DMO putting upward pressure on interest rates, which would have the effect of dampening consumer & investment spending due to higher costs, decreasing aggregate demand and thus...