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This Report Includes Information Regarding To The Background And Significance Of Interest Rate To The Capital Market.

2439 words - 10 pages

Executive SummaryThe purpose of this report is to analyze and discuss the effects of interest rate to the financial system of Australia. In this report, relevant sources from books and websites are used appropriately.Firstly, this report will briefly explain the background and significance of the low interest rate. The RBA maintained low interest rate because of weak global ecnomy and the need to boost local economy and investments. The significance of low interest rate can be shown in the impact to financial institutions, financial instruments and financial markets.Secondly, it will focus on four financial instruments, which are equity, government securities, corporate bonds and bank term loans. Low interest rate have increased share price of many companies as well as their profit. Regarding to securities, when interest rate is low, the rate of Treasury bonds will be low as well. Similarly, the interest rate of bank term loans will be low under such situation.Thirdly, it also analyses how will the long-term low interest rate affect financial market, participants and financial institutions. In the share market, the transactions will be increased due to prospective economic growth. It can also increase the demand for mortgages, so the banks can raise the volume of mortgages in order to increase their revenue.Finally, it will present the future development of interest rate. It is estimated that interest rates will be raised by the end of the year, however it is still uncertain consider other curial factors. Obviously there are both advantage and disadvantage in maintaining low interest rate. However, the interest rate change is heavily depending of the housing sector and the rest of the world.1. Background1.1 Low interest rate remain unchangedAfter Reserve Bank of Australia (RBA) has cut interest rate from 6.25 per cent in February to 5 per cent in April in early 2001 (http://www.rba.gov.au), when the economic slowdown in the United States and Japan, attended with the weak domestic economic growth and weakness of Australian currency. However now in 2003 after the strong growing of Australian currency and the world economy slowly recover with Australia's weak export, the interest rate remained at 4.75 from June 2002 to August 2003. When the TBA board meeting commenced early September 2003, it was decided that the interest rate remains unchanged (The Australian Financial Review, 03/09/2003).Figure 1. Interest rate movement from 1987 to 2003Source: http://www.rba.gov.auThe interest rate has been fluctuating significantly in the last 17 years in Australia (as Figure 1. above). It shows that the interest rate reached a very high peak in 1989, which was 18.35 per cent. Then the interest rate dropped enormously to a very low point in 1992, 93 and 94. In 1994, the interest rate was only 4.75%, which showed the lowest point. As shown in Figure 1, it is clear that there is a great reduction of interest rate from 18.35% in 1989 to 4.75% in 2003.1.2...

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