Money and Capital Markets Central Banks

Money and Capital Markets Central Banks Central banks normally control the interest rates through participating in the open market operations. A reserve bank would influence the state’s economy by either purchasing or issuing the government with marketable instruments (Elton, Gruber Brown 2006, p. 64). By selling, the central bank lowers the price of the marketable instruments in the open market.Advertising We will write a custom essay sample on Money and Capital Markets: Central Banks specifically for you for only $16.05 $11/page Learn More This leads to reduced interest rates of commercial banks and that of the entire economy. Similarly, the central banks may reduce the interest rates at which commercial banks borrow loans from central banks. This implies that commercial banks will respond by issuing loans to the public at reduced interest rates. In addition, the central bank may impose a ceiling on the interest rates above which the commercial banks would not be allowed to offer loans t o the public. Generally, interest rate is one of the monetary policies that are used to control various economic variables such as inflation rates and investments. The Indian Central Bank raised its interest rate in an attempt to improve the GDP growth in the year 2011. The central bank of India enhanced the benchmark repo rate by 0.025%. The interest stood at 8.5% as at mid October 2011. This move was essential since it would have seen the inflation rate contained within the accepted levels. According to the Reserve Bank of India, setting the interest rate for commercial banks gives guidance to banks as regards to the upcoming period (Currie 2011, p. 87). The interest rate of 8.5% was imposed with an expectation that inflation rates would decline in December 2011 and subsequently maintain the fall to 7% at the end of March 2012. According to the July Quarterly Review, the central bank of India had projected that the Gross Domestic Product would experience a growth of 8% for the yea r 2011 and 2012. Nevertheless, the September Quarterly Review indicated that the risk to the projected growth was declining. Many financial analysts claimed that based on the changes taking place in the economic environment, the downward baseline projection of Gross Domestic Product growth was expected to hit an average of 7.6% in 2011-2012 financial year.Advertising Looking for essay on business economics? Let's see if we can help you! Get your first paper with 15% OFF Learn More Bank of England was keen to ensure that the interest rate was maintained at sustainable levels to allow the economy of England keep off from the disasters associated with the European economic crisis. As at August 2011, the monetary policy committee of the Bank of England maintained the base rate at 0.5%. However, it made no changes on its quantitative easing plan. The economic analysts of the UK claimed that interest rates would not probably rise until the following year that is, 2012. This was expected to occur following the signs of inflationary pressures, which were to hit the peak. The inflation rate had dropped to 4.2% at the end of June. Although there were possibilities that utility bills had the potential of rising above 5%, financial analysts perceived that any rise would be temporal. The central bank of China is known as the People’s Bank of China. Economists claim that the People’s Bank of China is the largest financial institution in the world in terms of financial resources (Wittner 2003, p. 48). Chinese government and other financial analysts refer to the Chinese interest rate as the base interest rate. Unlike other central banks in the world, the People’s Bank of China has an absolute power and control over the use of fiscal policies. This implies that the bank has the autonomy of imposing the interest rate to various commercial banks in China. Over the last decade, the People’s Bank of China has been known for its influence in setting interest rates for debt instruments, savings and loans. The difference that exists between the Chinese central bank and that of other countries is that Chinese interest rate is divisible by nine while that of other nations are divisible by 25 (Reilly Brown 2007, p. 67). This is because the Chinese financial year has only 360 days. This makes it easier to calculate both monthly and daily interest rates. In December 2008, the Chinese interest rate was 5.310% while in June 2011, the interest rate rose to 6.560%. A difference exists between the U.S. Federal Reserve and the People’s Bank of China in terms of setting interest rates. The Federal Reserve only determines the rate for the Federal funds, which is always used to control the overnight inter-banks rates. On the other hand, the Central bank of China controls the entire market including the interest rates that are used by commercial banks. Normally, the central bank of china sets floor for lending rates and ceilings for deposit rates.Advertising We will write a custom essay sample on Money and Capital Markets: Central Banks specifically for you for only $16.05 $11/page Learn More In the last two years, a number of central banks embarked on cutting their interest rates in an attempt to improve the economic performance. The central banks that have cut their interest rates in the last two years include the Reserve Bank of Australia, the Bank of Japan, the Bank of England and the European Central Bank. The Bank of England set the highest record after it cut its interest rate by 150 basis points. Although lowering the interest rate is important when the economy is facing high prices, it is more risky when there are high chances of inflation (Reilly Brown 2007, p. 56). List of References Currie, D 2011, Country Analysis: Understanding Economic and Political Performance, Gower Publishing Limited, New York. Elton, E, Gruber, M Brown S 2006, Modern Portfolio Theor y and Investment Analysis, John Wiley, New York. Reilly, K Brown, C 2007, Investment Analysis and Portfolio Management, Thomson, South Western. Wittner, P 2003, The European Generics Outlook: A Country-by-Country Analysis of Developing Market Opportunities and Revenue Defense Strategies, Datamonitor, London.