Introduction
The RBA tried to manipulate the economy by reducing interest charges. Over the preceding year, other regions like Europe, India, and China also lowered their interbank loan rates. Indeed, interest rates are vital to currencies since they affect the world’s capital flow. Moreover, they serve as benchmarks for what investors expect to gain after investing in a certain state or endeavor. To improve the country’s economy, the central banks have lessened the interbank lending rates with the intent of attracting investors. The cutting of the interbank lending rates help in sustaining lending, and this makes the banks recover some of their losses.
Europe
Over the preceding year, the Federal bank in Europe cut its major policy rate; furthermore, the rate on the key refinancing operations was at 1%. The grim view of the financial system in the euro sector and the inflation drop made it necessary to exhaust the remaining scope; thus, cutting the rates on the main refinancing activities urgently. The European banks had highly invested in the subprime connected goods and were affected within the course of the subprime crisis in the United States. The banks in Europe faced a reduction in their subprime investments, which resulted in losses for some banks.
The resulting credit crunch caused the elevation of borrowing rates and escalation in mortgage defaults. The banks in Europe were forced to tighten the lending conditions after finding it intricate to elevate capital in the interbank market. To sustain the interbank lending and consumption, the Europe Central Bank had to lower the lending rates. The European Central Bank and related banks and governments combined forces in cutting interbank loan rates, and in guaranteeing bank deposits together with interbank lending. This focused on making money flow (UNE & Social Commission for Asia and the Pacific 2008).
China
The Chinese economy is upgrading; thus, becoming market-oriented. This necessitates a move from the direct methods of allocating credit and implementing the monetary guiding principle, to the indirect method. This is not fixed using a liberalized banking arrangement and the administration of bank reserves by the central bank. To avoid financial shrinking, the Bank of Japan supported China in cutting the interbank lending rates.
As such, the interest adjustment has reduced the burden on the state-owned corporate. The central bank “interbank lending rates” policy affects the countries financial market. In the country, this adjustment has presented noticeable implications on the monetary market. The obvious noticeable outcome was the trend of low monetary interests as represented by the rate of interest in interbank market lending.
The cutting of the interest rate caused a great effect on the number of transactions in the interbank market. This implies that in the country, the monetary markets, which include the interbank market, are not mature. The interest rate reductions have narrow effects on the capital market. There was not a permanent resurgence in the secondary market, and the action was not successful in stimulating investments through any surge in the stock market (Goodfriend & Prasad 2006).
India
India also reduced their interbank lending rates considerably last year in September. Indeed, there is still a possibility to lower the rates further to strengthen the mending of their financial losses. However, the actual overnight rates dropped beyond the major refinancing operations. The introduction of the scheme of limitless liquidity supply at the fixed key refinancing operations rate last year made the overnight rate hover between the refinancing rate, which efficiently acts as a restriction for the interbank overnight lending, and the deposit charges that acts as a floor. The main centers of “Interbank Call Money Market in Mumbai and Kolkata in India” (Publishing Oecd Publishing 2009).
In these centers, the Exchange Banks are the key borrowers and, hence other banks follow the operations set by them. The banks borrow from divergent entities and amidst themselves at a call or short notices in the market to tide over temporary stringencies arising when the number of bills offered to exceed the number of bills. The Reserves Bank in India has cut the lending rates to relieve pressures in the interbank markets (Publishing Oecd Publishing 2009).
Conclusion
In a bid, to react to the worldwide financial problems resulting from interbank lending by central banks, the banks, and the governments are cutting the lending rates. Furthermore, central banks must manage the collective bank reserves fully to realistically make the inflation expectations stable. Control of bank reserves is essential since a federal bank must manage collective demand over the business cycle by manipulating the bank capital.
To augment the strengths in aggregate demand, central banks must increase the development of bank reserves. The surplus supply of bank reserves encourages borrowing, and expenditure by stimulating banks, lending, putting downwards pressure on interbank interest rates, and inducing banks to cut interest rates. Excess demand for bank reserves slows borrowing, and spending by restricting bank lending, driving up interbank interest rates, and inducing banks to raise loan rates (Schiff, Kang, Buton, et al 2008).
List of references
Goodfriend, M, & Prasad, E 2006, A framework for independent monetary policy in China, IMF, Washington.
Publishing Oecd Publishing 2009, OECD Economic Outlook, Volume 2009 Issue 1, Organization for Economic Cooperation & Development, Washington.
Schiff, J, Kang, K, Burton, D et al 2008, Regional economic outlook: Asia and Pacific, International Monetary Fund, Washington.
UNE & Social Commission for Asia and the Pacific, 2008, Economic and social survey of Asia and the Pacific, 2008: Sustaining growth and sharing prosperity, Published for and on behalf of the United Nations by Academic Foundation, New Delhi.