Embedded Research Project Essay Example
Figure 1: Graph showing the Australian cash rate, year ended inflation and the standard owner-occupier housing loan interest rate
Australian cash rate refers to the benchmark interest rate set by the reserve bank of Australia on the basis of inflation target which is charged on overnight borrowings between financial institutions. The year-end inflation on the other hand refers to the state of inflation within a one year period. In other words, it refers to the rate at which prices of commodities have increased or declined within a one year period. On the other hand, the standard variable owner occupier lending rates refer to the average rate that is paid for standard loans to home-occupiers at variable rates taking into account various types of lenders and discount packages and is an important indicator of home loan rates.
From the graph, similar trends are noted for the Australian cash rate, the year-end inflation and the standard variable owner occupier lending rates. The major reason for this is that lending rates as well as the cash rates are greatly determined by the rate of inflation and to some extent, they also influence the rate of inflation. Thus, when the rate of year end inflation rises, the standard variable owner occupier lending rates and the Australian cash rate also rise. The vice versa is true. From the graph, it can be seen that the rate of inflation, the cash rate and the standard variable owner occupier lending rates are highest in August 1990. At this time, the cash rate was 14%, the year-end inflation rate was 7.4% while the standard variable owner occupier lending rate was 16.5%. On the other hand, the year-end inflation was lowest between September 1997 and March 1998 when it ranged between -0.4 and -0.1. However, the Australian cash rate was lowest in August 2016 when it was 1.5%. Similarly, the standard variable owner occupier lending rate was lowest in August 2016 when it was 5.25%. However, the drop in all the three variables has not been constant although the general trend is that the rates were highest in 1990 and lowest in 2016.
The mean for the year end inflation for the period between August 1990 and August 2016 is 2.8% while the year-end inflation median during the same period was 2.5%. The standard variable owner occupier lending rate had its mean for the period between August 1990 and August 2016 as 7.89% while the median during the same period was 7.3%. On the other hand, the average Australian cash rate for the same period was 5.27 for the period between 2nd August 1990 and 3rd August 2016 with the median cash rete being 5%.
The Australian cash rate as stated above was highest in 1990 and lowest in 2016. However, there have been upwards and downwards trends in between implying that the decline has not been constant (Raynes, 2003). The increases as noted could have been caused by economic shocks that would have led to rising inflation and hence the RBA increasing the rate in a bid to curb inflation. On the other hand, the declines resulted from improving economic conditions not only in Australia but also in other countries thus easing inflationary pressures resulting in low inflation rates. Thus, RBA reduces the cash rate owing to the reduced inflation.
The cash rate, inflation and the standard variable owner-occupier home loan rate all move in a similar manner. When inflation increases, interest rates rise an action from RBA to curb increasing inflation. When inflation eases, the rates also reduce as a result.
Raynes, S2003, Interest rate determination and the effect of Asian financial crisis in Malaysia, London, Rutledge.
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