Week 1 PPT Slides.pptx

BAFI3 271 WEEK 1: INTRODUCTION TO MONEY AND DEBT MARKETS  LEARNING OBJECTIVES Understand the characteristics and structure of the money market. Outline monetary policy techniques used by the Reserve Bank to influence interest rates Define and describe the cash rate...

BAFI3 271 WEEK 1: INTRODUCTION TO MONEY AND DEBT MARKETS  LEARNING OBJECTIVES Understand the characteristics and structure of the money market. Outline monetary policy techniques used by the Reserve Bank to influence interest rates Define and describe the cash rate Understand the purpose of monetary policy and the impact of changes in policy settings Describe tools the Reserve Bank uses to target the cash rate through open market operations and the impacts on system liquidity Describe the purpose and operation of the payments system  RMIT Classification: Trusted LECTURE OUTLINE Money market structure The cash rate Monetary policy Open Market Operations Repurchase agreements Payments System MONEY MARKET Definition: The money market is the market which deals in short-term discount securities such as Treasury notes, bank bills and promissory notes. Major participants in this market include the Reserve Bank of Australia, banks, superannuation funds, insurance companies, investment trusts, investment banks, building societies and large corporates. Source: Reserve Bank of Australia THE CASH RATE Definition: The interest rate which banks pay to borrow funds from other banks in the money market on an overnight basis. The cash rate is the Reserve Bank of Australia's operational target for the implementation of monetary policy. It is also an important financial benchmark in the Australian financial markets. It is used as the reference rate for Australian dollar Overnight Indexed Swaps (OIS) and the ASX 30 Day Interbank Cash Rate Futures. The Reserve Bank of Australia is the administrator of the cash rate. The cash rate is calculated as the weighted average interest rate on overnight unsecured loans between banks settled in the Reserve Bank Information and Transfer System (RITS). Source: Reserve Bank of Australia (emphasis added) CASH RATE TARGET AND OVERNIGHT CASH RATE There are two cash rates in So what? Australia 1. Reserve Bank of Australia’s (RBA) operational target for the cash rate is also called the The cash rate is the “official interest rate”. This is benchmark for all rates the rate that is announced in the money market when the RBA changes monetary policy. 2. The Interbank Overnight Cash Rate (or Overnight Cash Rate), is the weighted average interest rate on MONETARY POLICY Actions of the Reserve Bank that influence interest rates in order to achieve the following economic objectives:  stability of the currency  maintenance of full employment  economic prosperity and welfare of the Australian people  maintain inflation within a 2–3% range over the business cycle Watch: Monetary Policy – Philip Lowe, Governor of the Reserve Bank of Australia https://youtu.be/gGvzisuSmQE MONETARY POLICY Watch: Monetary Policy – Philip Lowe, Governor of the Reserve Bank of Australia https://youtu.be/gGvzisuSmQE MONETARY POLICY By impacting on the cash rate (overnight interbank rate), the Reserve Bank can affect rates of longer term securities, for example:  tightening monetary policy by selling Commonwealth Government securities (CGSs) and reducing the money supply  causing investment and household spending to decrease The RBA is able to change the cash rate through open market MONETARY POLICY Monetary policy is directed at Overnight Cash Rate it has influence on output, employment and prices through the following channels:  Monetary Policy Channel  Credit Channel  Wealth Channel  Foreign Exchange Channel  maintain inflation within a 2–3% range over the business cycle Watch: Monetary Policy – Philip Lowe, Governor of the Reserve Bank of Australia https://youtu.be/gGvzisuSmQE OPEN MARKET OPERATIONS Open market operations  Conducted primarily by:  repurchase agreements (repos) on nominated debt securities  outright or direct transactions in short-dated Commonwealth Government securities (CGSs) sales of CGSs reduce supply of cash in money market purchases of CGSs inject additional cash  foreign exchange swap  The Reserve Bank holds and manages a portfolio of CGSs to maintain system liquidity and effect monetary policy  The Reserve Bank achieves this by purchasing CGSs in the secondary market and occasionally taking an allotment at tender. Copyright © McGraw-Hill Education (Australia) Pty Ltd OPEN MARKET OPERATIONS Watch: Open Market Operations – Guy Debelle, Assistant Governor of the Reserve Bank of Australia https://youtu.be/Z0H_CXN5tKM REPURCHASE AGREEMENTS Repurchase agreements (repos)  A repo is the sale of CGSs to the Reserve Bank on condition the seller will normally buy them back by day’s end or a later date  It provides intra-day liquidity for same-day funds for exchange settlement account holders Reverse Repurchase agreements (reverse repos)  A repo is the purchase of CGSs from the Reserve Bank on condition the buyer will normally sell them back by day’s end or a later date  It absorbs intra-day liquidity for same-day funds for exchange settlement account holders FOREIGN EXCHANGE SWAP A foreign exchange swap is similar to a repos except that the Reserve Bank agrees to swap foreign currency for Australian dollars with an agreement that the transaction will reversed at a specific exchange rate at a later date. Foreign exchange swaps can also work in reverse where the Reserve Bank agrees to swap Australian dollars for foreign currency with an agreement that the transaction will reversed at a specific exchange rate at a later date.. PAYMENTS SYSTEM Payments system  Facilitates the transfer of value of a financial instrument, used in transactions for goods and services, from one party to another  Transactions may be cash or non-cash instruments PAYMENTS SYSTEM The payments clearing system in Australia is called the Australian Payments Network (AusPayNet). Payments system clearing systems  Australian Paper Clearing System for cheques, payment orders and other paper-based payment instructions  Bulk Electronic Clearing System for recurring electronic credit and debit payment instructions  Consumer Electronic Clearing System for card-based ATM and EFTPOS transactions and ‘pay anyone’ via the internet  High Value Clearing System for high-value payment instructions  Australian Cash Distribution Exchange System for the movement of notes and coins PAYMENTS SYSTEM Payments classified by the Reserve Bank in two ways 1. High-value—large-value transactions for assets (e.g. property, wholesale market equity, debt securities and FX transactions) cleared by real-time gross settlements (RTGS) 2. Low-value—day-to-day payments for goods and services, particularly by the household sector PAYMENTS SYSTEM Exchange settlement accounts  A special account held with the Reserve Bank to facilitate the settlement of value transactions within the payments system  Held by banks, special service providers (building societies and credit unions) and other providers of payments services  Exchange settlement account transactions use same-day funds, (funds not requiring clearing through the payments system) PAYMENTS SYSTEM Real-time gross settlement (RTGS)  Australia operates a system of RTGS  This requires that each high-value payment transaction be settled immediately through exchange settlement accounts  The Reserve Bank requires banks to maintain their exchange settlement accounts in credit with same-day funds  To facilitate management of liquidity, the Reserve Bank provides intra-day repurchase arrangement for exchange settlement account holders