The Reserve Bank of Australia (RBA) is a “statutory authority that acts on behalf of the Government to control the cost and availability of both money and credit in the economy.” All of the RBA’s responsibilities are outlined in the ‘Reserve Bank Act 1959’ and indicates that one of its primary responsibilities is the monetary policy. The main function of monetary policy is Domestic Market Operations, which is aimed to influence the level of interest rates in the economy.
As seen in the case study “The Reserve Bank of Australia reduced it’s cash rate by 0.5% and in turn the Commonwealth Bank then announced that in response it would reduce its variable home loan rate by only 0.35%.” A reduction in the cash rate has allowed the Commonwealth Bank to lower its interest rates as the cost of borrowing money for the bank has decreased in the short-term money market. By reducing their interest rates the Commonwealth Bank encourages borrowing by both consumers and businesses, which leads to a “rise in consumption and investment demand” . In turn increasing the level of spending and level of activity in the economic market. Reduced interest rates can also mean that existing debt holders’ can get cheaper rates on already existing loans which means it becomes cheaper and it allows them to increase their spending in normal day to day life.
The Commonwealth Bank is a part of an oligopoly which is a market or industry dominated by a small number of sellers. An oligopolistic market is taken up by leading firms that produce or offer the same types of goods and services. Resulting in one company/ firm being dominant creating price leadership competition. ‘Traditionally the price leader in the banking industry has been the Commonwea ...