Macroeconomic policy of Reserve Bank of Australia Essays - Economy

Macroeconomic policy of Reserve Bank of Australia Essays - Economy THE DECISION OF THE RESERVE BANK OF AUSTRALIA TO KEEP THE INTEREST RATE UNCHANGED AT 1.5% Case Study By Tapas K. Chakraborty TABLE OF CONTENTS INTRODUCTION 3 OBJECTIVES OF MONETARY POLICY 5 MACROECONOMIC INDICATORS OF MAJOR COUNTRIES 9 JUSTIFICATION FOR THE DECISION 10 MONEY MARKET EQUILIBRIUM AND MONETARY TRANSMISSION MECHANISM14 ECONOMIC GROWTH18 CONCLUSION19 REFERENCES20 INTRODUCTION The instant case study is built upon succinct analysis of the macroeconomic dynamics interacting in Australian and global landscape, before and aftermath of the decision of the Reserve Bank of Australia (RBA) to keep the interest rate unchanged at 1.50%. The important macroeconomic policy decision was announced by the Governor of RBA in the media release dated 4th December, 2018. It was asserted by Mr. Lowe, Governor of RBA, that financial conditions of Australia and advanced economies did not warrant any change in the existing cash rate. The Reserve Bank of Australia (RBA) Board, after the meeting, unanimously agreed that no monetary stimulus resulting from lowering of interest is necessary in the background of expansionary domestic and international economy The RBA Governing body's decision to keep the interest rate unchanged is based upon the macroeconomic dynamics underpinning the money market and goods market equilibrium, and the effect that interest rate could instill upon the equilibrium in money market and good market. The RBA Board posits that global economic conditions have improved since 2017, and most of the advanced economies have been able to register more than expected positive economic growth, and the employment scenario of the countries have significantly improved. Australia's terms of trade (TOT) has improved and continues to be robust. This shows the country is capable of combating cost-push inflation as the prices of imported goods continue to be at the lower side. The RBA Board also argues that inflationary pressure of all the advanced countries including Australia is near the acceptable level as wage-push inflationary pressure remains low. The economies of many advanced countries are in expansionary path in spite of absence of any monetary stimulus. The optimism in the Australian economy is well evidenced in the strong equity market, less volatility, and diminished gap between bond yield and other maturities. The economy of the country grew at expected rate during the quarter ended September, 2018, and the Gross Domestic Product GDP) of the country is expected to grow by 3% in the next five years. Increased business activities in the country are evidenced in increase in capacity utilization of industries and better performance by non-mining sectors. The RBA is of the view that the infrastructure of the country is highly conducive to economic growth, unemployment rate is declining, and labor-force participation continues to improve. The 2% percent underlying inflation rate in the country is expected to improve to further effective level as the economy expands. OBJECTIVES OF MONETARY POLICY Monetary policy is an envelope of policies involving interest rate, public debt, and monetary standards, intended to influence credit volume, price level, and economic activities ( The Balance, 2017). The chief objective of monetary policy is to protect the economy from the onslaught of trade cycles. An elastic monetary policy enables the country to achieve sustained growth at healthy rate of inflation. The apex banking institution of a country monitors the volume of money in the economy by adopting appropriate monetary policy depending upon the macroeconomic conditions of the country. The Central Bank of a country controls credit by open market operations, selective credit control, and fluctuations in the interest rate. The first two methods are intended to control supply of money directly, while the last one is meant for indirectly controlling the demand for money. Functions of money: The following 5 important functions are performed by money: (Cliff Notes, 2017); It is the medium of exchange. It acts as a store of value. It functions as standard of measuring value . It serves as the standard of deferred payments. It is used for transferring value from one place to another. Functions of RBA: RBA, established under Reserve Bank Act, 1959, is the apex banking authority of the country entrusted with the task of monitoring the monetary mechanism required for smooth functioning of the economy for sustained economic growth of the country. The RBA is responsible for maintaining adequate resource flow