Financial Decision

This report provides information relating to an analysis of associations between companies' financial decision and cash rate movement. The report points out how does entity interact to interest rate increase and decrease in general conditions and special circumstances, and further divide the following financial decisions into two parts, which is funding decisions and investing decisions.

The report using Australian companies' reaction to official cash rate changes as examples analysed the strategies on financial decisions during the period, specific consideration is provided by tracing cases.

Thus, finds that, in general, companies will concentrate more on investing decisions when interest rate increases, whilst, expanding borrowings during interest cut based on cost-risk decision model. However, special consideration should be given on liquidity, risk assessment, small boutique financial firms, etc.

While, further recommendations need to be addressed, considering impact on time lag and international financial market, such as hot money inflow.

In responding to changes of economic environment and maintenance of financial stability, the Reserve Bank of Australia (RBA) sets a target cash rate based on the demand and supply for the two main categories of cash, aiming to have a flow on impact to the business cycle and the inflation rate. Generally, interest rate moves in the same direction with official cash rate. By increasing or decreasing the interest rate, RBA hopes to bring the expanded economic back to normal or incentive the gloomy financial market to boost. Therefore, for most companies whose investing and funding decisions are based on risk-cost model, understanding the dynamics of interest rates becomes essential as it influence forecasting, risk management and pricing of fixed-income securities, etc. Although changes in interest rates are indicators for all the three company decisions, the main impact is on funding decision due to the sensitivity of borrowing decisions to the accuracy of interest rate forecasts.

Accordingly, this report will analyse entities' financial decision in reaction to the movement of cash rate from funding and investing two aspects and summarize its financial policy under general conditions as well as special circumstance. Finally, further recommendation of consideration on interest rate association with companies' financial decision will be advised.