Question

3-1 Looking back on 4 March 2008 when the interest rate was set at 7.25% by RBA (Reserve Bank Australia), however since then RBA gradually reduced the interest rate to its lowest 1% on 3 July 2019. Present an overview on the expectations or motivations behind such interest rate cut by RBA? (summary)

[Note: In the early 1990s the interest rate was 17.5%, you don’t need to go back such distant past, your analysis should focus between 2008 to 2019]

3-2 Identify the possible impact of interest rate cut on investments in the capital market in Australia.

[Note: Here you can investigate the differences in impact between debt instruments and equity instruments in the capital market, you can use table, chart, graph wherever you would find it appropriate]

3-3 Identify the possible impact of interest rate cut on the Real Estate market in Australia.

[Note: You can analyse the differences in impact between foreign sourced investment and local sourced investment in the Real Estate Market, you can use table, chart, graph wherever you would find it appropriate]

3-4 There are four countries (Japan, Sweden, Denmark and Switzerland) have negative interest rates. What could be the expectations/ motivations to drop interest rate below zero?

Could you please give me a quick summary of the solution to each question so that I may expand on this. It is for my current job.

Answer 1

3.1

RBA cuts interest rate in order to grow the economy. During the last 10 to 11 years an economy faces various challenges that is why RBA cuts its interest rate. The various challenges includes an economy faces a problem of shortage of cash due to which the import and export of goods and services also gets reduced. Due to high interest rate, individuals does not invest in the securities and they kept their money with them that is why the investment in economy also goes down. Therefore, due to these challenges RBA cuts down its interest rate to boost an economy and increase the rate of export and import.

3.2

The various impact of decreasing the interest rate on debt instruments and equity instruments are as mentioned below:

Due to the decrease an interest rate by RBA the demand of equity instruments are increased because individuals spend more money in the market. On the contrary, the demand of debt instruments decreases because individuals are not ready to buy the bonds at higher price. As the decrease in the interest rate by RBA will higher the prices of bonds.

3.3

The various impact of decreasing the interest rate on foreign sourced investment and local sourced investment are as mentioned below:

Due to the decrease an interest rate by RBA, individuals or residents of that country invest more in the local sourced investments as compared to the foreign sourced investments. As residents of that country wants to spend more money on the assets rather than savings.

3.4

In the given four countries, an interest rate falls zero their motive is to increase the spending money by the individuals rather than savings to save an economy from the situation of deflationary or recession. Therefore, the expectations of cuts down an interest rate below zero is to save an economy from the situation of recession.