Loanable Funds Market in Australia

1988 Words Aug 26th, 2008 8 Pages
1. Introduction:
The Reserve Bank of Australia is considering an increase in the target cash rate by 25 basis points in the near future. It is the intention of this report to analyse the positive and negative impacts of a rise in interest rates on the loanable fund market in Australia.

In order to analyse the impacts of an increase in interest rates on the loanable fund market, the reasons behind the possible rate rise in the near future will be looked upon.

Charts and diagrams have been used to illustrate the intention of this report and it is hoped that by looking at these vital elements the intended user will be able to understand the issue more thoroughly and follow the analysis behind it and get a clear understanding of the issue.
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Lenders would compete for borrowers, driving the interest rate down. Similarly, if the interest rate in the market is less than the equilibrium rate, the quantity of funds demanded would be greater than the quantity of funds supplied. The shortage of loanable funds would result in upward pressure on the interest rate (Mankiw, 2001). 4. Effect of demand on Interest rates for Loanable Funds: The demand on interest rates for loanable funds affects the Household sectors, Business sectors and Government sectors.
4.1 Household Sectors: The impact of a rate rise decreases the demand for the loanable funds from the household sector. As this foreseeable increase interest rate could add $50 to the monthly repayments on a $300,000 mortgage. This may discourage many new home buyers to differ from buying a house for now, due to the added costs of taking out a mortgage during a period in which interest rates are expected to be high.
However, at present in Australia the demand for housing is positive and high. "The household sector is doing very well, despite the Reserve Bank raising interest rates,'' said Westpac senior economist Andrew Hanlan (Bourlioufas & Wires, 2007). This is so because the low petrol prices helped the household sector in doing well (Bourlioufas & Wires, 2007).
However, inspite of the household

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