Monetary Policy: RBA
Monetary Policy
Monetary policy is a macroeconomic policy implemented by the RBA to attain a set of objectives through the basis of a stable and maintained inflation band of 2-3%. Indirectly by the implementation of monetary policy, supply of money is affected through changes in the interest rate; cost of living is methodically altered to suit chosen economic conditions and economic growth is steadied and sometimes purposely stagnated.
There are two different directions for monetary policy to move, that is in a contractionary manner or an expansionary one. The implementation of contractionary monetary policy is indicative of a slowdown in economic growth due to a rise in the cash rate, whereas an expansionary policy would lead to increased …show more content…
growth from a reduction of the cash rate.
Since 2008 the RBA have been implementing a contractionary monetary stance, raising the cash rate by 1.75% at a level of 4.75%, and are expected to maintain this position in upcoming months.
The implementation of monetary policy is determined by a range of factors consisting of things like economic growth, employment, external stability, consumer confidence, and of course, inflationary pressures.
One of the factors contributing to an influence of monetary policy is the level of the Australian dollar (currently at approximately $1.05 US). If a contractionary level of monetary policy were to be implemented, the Australian dollar would appreciate significantly, thus depleting our international competitiveness further and leading to external instability; figures show that exports have decreased by 8.7% while imports increased by 1.3% due to a high dollar making it cheaper to purchase.
A key factor to this is Australia’s external stability and global economic conditions; for example the debt crisis in Greece, acting as a potential contagion of global downturn, the US economy’s debt burden is also a negative impact towards global conditions. The key impact however to Australia’s external stability is the attempt of China to slow down their growth due to a high inflation rate of 5.5%, the highest China has seen in 3 years. The slow down in Chinas growth will see Australia’s exports decline, however our terms of trade will be buoyed by the high Australian dollar, seeing the highest level ToT in over 140 years at 85%, which is predicted to last at least 4 years, not to mention the resource boom which has greatly accelerated our growth in the mining …show more content…
sector.
The Decline in China’s economy affects the RBA’s decision on monetary policy as they would become hesitant to raise the interest rates due to implications it may have on economic growth. Australia has recorded -1.2% growth for the march quarter, this is mainly due to the isolated natural disasters in Queensland, which is considered to be an anomaly, justifying the stagnation of the cash rate in the money market.
As well as exports decreasing by 8.7%, this reduces revenue for Australia, and is further detrimental to cash flow and the current account deficit which by the way saw an increase by $2.5 billion from $8 billion in the December quarter of 2010 to $10.5 billion in the march quarter 2011. This could be due to a number of factors, such as the flood relief in Queensland, the decline in exports and increase in imports and so on. The RBA would take this into consideration when determining the cash rate, it would also take into account the $430 billion investment pipeline in minerals and energy said to be the largest investment Australia has ever seen and is expected to generate billions of dollars in revenue.
Consumer Sentiment is the major factor determining the RBA’s decision on a more than likely contractionary bias in monetary policy.
Confidence dropped by 2.7% in recent months from 103.9% to 101.2%; contributing to this is the contractionary fiscal policy implemented by the government , decreasing government expenditure and raising government revenue through increased taxes. Also, factors such as above average interest rates ( highest in the developed world), tighter lending policies by banks, and the general increase of living standards due to cost-push inflation from the natural disasters in Queensland, and political unrest in Libya, increasing oil prices by 8.1%, fruit by 16% and vegetable prices by 14.5%
In the housing sector, rent has increased by 1.2% since February 2009 and house prices already said to have been the most inflated in the world (40% inflation level) have stagnated due to a lack of demand, thus showing a decrease in average house prices by 2.5% in the march quarter, therefore further reducing consumer confidence and showing further reluctance of the RBA’s decision to hike rates to 5%
sooner.
If the RBA implements a contractionary monetary policy sooner, the implications would be detrimental to the economy, as interest rates will be raised thus leading to an appreciation of the Australian dollar which would show a slump in international competitiveness, however would increase the ToT further and would decrease the amount of the CAD In that respect. However until the $430 billion investment pipeline is underway, Australia will see a decrease in consumer confidence and therefore economic growth if a contractionary monetary stance is implemented.
The factors mentioned will be taken into account by the RBA in their process of determining an already anticipated rate rise in the months ahead. In my opinion, however, I believe the RBA will raise the cash rate not for at least a few months until employment is on the rise again from the current rate of 4.9% and until a skills shortage in other sectors apart from resource is apparent. Also they will be hesitant until a somewhat expansionary fiscal policy is implemented and there continues to be strong economic growth throughout all sectors.
Monetary policy is a macroeconomic policy implemented by the RBA to attain a set of objectives through the basis of a stable and maintained inflation band of 2-3%. Indirectly by the implementation of monetary policy, supply of money is affected through changes in the interest rate; cost of living is methodically altered to suit chosen economic conditions and economic growth is steadied and sometimes purposely stagnated.
There are two different directions for monetary policy to move, that is in a contractionary manner or an expansionary one. The implementation of contractionary monetary policy is indicative of a slowdown in economic growth due to a rise in the cash rate, whereas an expansionary policy would lead to increased …show more content…
growth from a reduction of the cash rate.
Since 2008 the RBA have been implementing a contractionary monetary stance, raising the cash rate by 1.75% at a level of 4.75%, and are expected to maintain this position in upcoming months.
The implementation of monetary policy is determined by a range of factors consisting of things like economic growth, employment, external stability, consumer confidence, and of course, inflationary pressures.
One of the factors contributing to an influence of monetary policy is the level of the Australian dollar (currently at approximately $1.05 US). If a contractionary level of monetary policy were to be implemented, the Australian dollar would appreciate significantly, thus depleting our international competitiveness further and leading to external instability; figures show that exports have decreased by 8.7% while imports increased by 1.3% due to a high dollar making it cheaper to purchase.
A key factor to this is Australia’s external stability and global economic conditions; for example the debt crisis in Greece, acting as a potential contagion of global downturn, the US economy’s debt burden is also a negative impact towards global conditions. The key impact however to Australia’s external stability is the attempt of China to slow down their growth due to a high inflation rate of 5.5%, the highest China has seen in 3 years. The slow down in Chinas growth will see Australia’s exports decline, however our terms of trade will be buoyed by the high Australian dollar, seeing the highest level ToT in over 140 years at 85%, which is predicted to last at least 4 years, not to mention the resource boom which has greatly accelerated our growth in the mining …show more content…
sector.
The Decline in China’s economy affects the RBA’s decision on monetary policy as they would become hesitant to raise the interest rates due to implications it may have on economic growth. Australia has recorded -1.2% growth for the march quarter, this is mainly due to the isolated natural disasters in Queensland, which is considered to be an anomaly, justifying the stagnation of the cash rate in the money market.
As well as exports decreasing by 8.7%, this reduces revenue for Australia, and is further detrimental to cash flow and the current account deficit which by the way saw an increase by $2.5 billion from $8 billion in the December quarter of 2010 to $10.5 billion in the march quarter 2011. This could be due to a number of factors, such as the flood relief in Queensland, the decline in exports and increase in imports and so on. The RBA would take this into consideration when determining the cash rate, it would also take into account the $430 billion investment pipeline in minerals and energy said to be the largest investment Australia has ever seen and is expected to generate billions of dollars in revenue.
Consumer Sentiment is the major factor determining the RBA’s decision on a more than likely contractionary bias in monetary policy.
Confidence dropped by 2.7% in recent months from 103.9% to 101.2%; contributing to this is the contractionary fiscal policy implemented by the government , decreasing government expenditure and raising government revenue through increased taxes. Also, factors such as above average interest rates ( highest in the developed world), tighter lending policies by banks, and the general increase of living standards due to cost-push inflation from the natural disasters in Queensland, and political unrest in Libya, increasing oil prices by 8.1%, fruit by 16% and vegetable prices by 14.5%
In the housing sector, rent has increased by 1.2% since February 2009 and house prices already said to have been the most inflated in the world (40% inflation level) have stagnated due to a lack of demand, thus showing a decrease in average house prices by 2.5% in the march quarter, therefore further reducing consumer confidence and showing further reluctance of the RBA’s decision to hike rates to 5%
sooner.
If the RBA implements a contractionary monetary policy sooner, the implications would be detrimental to the economy, as interest rates will be raised thus leading to an appreciation of the Australian dollar which would show a slump in international competitiveness, however would increase the ToT further and would decrease the amount of the CAD In that respect. However until the $430 billion investment pipeline is underway, Australia will see a decrease in consumer confidence and therefore economic growth if a contractionary monetary stance is implemented.
The factors mentioned will be taken into account by the RBA in their process of determining an already anticipated rate rise in the months ahead. In my opinion, however, I believe the RBA will raise the cash rate not for at least a few months until employment is on the rise again from the current rate of 4.9% and until a skills shortage in other sectors apart from resource is apparent. Also they will be hesitant until a somewhat expansionary fiscal policy is implemented and there continues to be strong economic growth throughout all sectors.