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Lecture Financial institutions, instruments and markets (4/e): Chapter 13 - Christopher Viney

Chapter 13 - An introduction to interest rate determination and forecasting. After completing this unit, you should be able to: Explain the reasons for a change in the RBA’s interest rate policy, describe how changes in interest rates affect the rest of the economy, outline the possible shapes of a yield curve, explain the theories that describe how a yield curve obtains its shape. | Chapter 13 An Introduction to Interest Rate Determination and Forecasting Learning Objectives Explain the reasons for a change in the RBA’s interest rate policy Describe how changes in interest rates affect the rest of the economy Outline the possible shapes of a yield curve Explain the theories that describe how a yield curve obtains its shape Chapter Organisation 13.1 Introduction 13.2 Macroeconomic Context of Interest Rate Determination 13.3 Loanable Funds Approach to Interest Rate Determination 13.4 Term and Risk Structure of Interest Rates 13.5 Summary 13.1 Introduction In most developed economies monetary policy actions are directed at influencing interest rates By understanding what motivates a central bank in its implementation of interest rates policy Financial market participants can anticipate changes in a govt’s interest rate policy Lenders and borrowers can make better-informed decisions Chapter Organisation 13.1 Introduction 13.2 Macroeconomic Context of Interest Rate . | Chapter 13 An Introduction to Interest Rate Determination and Forecasting Learning Objectives Explain the reasons for a change in the RBA’s interest rate policy Describe how changes in interest rates affect the rest of the economy Outline the possible shapes of a yield curve Explain the theories that describe how a yield curve obtains its shape Chapter Organisation 13.1 Introduction 13.2 Macroeconomic Context of Interest Rate Determination 13.3 Loanable Funds Approach to Interest Rate Determination 13.4 Term and Risk Structure of Interest Rates 13.5 Summary 13.1 Introduction In most developed economies monetary policy actions are directed at influencing interest rates By understanding what motivates a central bank in its implementation of interest rates policy Financial market participants can anticipate changes in a govt’s interest rate policy Lenders and borrowers can make better-informed decisions Chapter Organisation 13.1 Introduction 13.2 Macroeconomic Context of Interest Rate Determination 13.3 Loanable Funds Approach to Interest Rate Determination 13.4 Term and Risk Structure of Interest Rates 13.5 Summary 13.2 Macroeconomic Context of Interest Rate Determination A central bank may increase interest rates if there is Inflation above three per cent Excessive growth in GDP A large deficit in the balance of payments Rapid growth in credit and debt levels Excessive ‘downward’ pressure on the Australian dollar 13.2 Macroeconomic Context of Interest Rate Determination (cont.) An increase in interest rates (i.e. tightening of monetary policy) will Eventually increase long-term rates Slow consumer spending Reducing inflation and demand for imports 13.2 Macroeconomic Context of Interest Rate Determination (cont.) An increase in interest rates (i.e. tightening of monetary policy) will (cont.) Decrease the size of the current account May attract foreign investment causing the domestic currency to appreciate 13.2 Macroeconomic Context of Interest Rate Determination .