Interest Rate Set by Central Bank of Australia in the Short Term

The Reserve Bank of Australia has not changed its cash rate for a very long term on account of stability in the economy and various other parameter impacting the rate of interest in the short term and long term including both internal and external factor. The report deals with the past period, current factors that impact the decision of cash rate and the performance of the economy in the short term and the future outlook of the economy and how the same shall impact the future outlook. The following questions have been dealt here-

APPLIED ECONOMICS
Introduction
In the present report, a retail importer of goods seeks to analyse the rate of interest in the short
term and has query regarding the direction of the interest rate set by the central bank authority of
the country i.e. Reserve Bank of Australia in the present context. The Reserve Bank of Australia has
not changed its cash rate for a very long term on account of stability in the economy and various
other parameter impacting the rate of interest in the short term and long term including both
internal and external factor. The solution below try to trace the movement of the interest in the
short term on the basis of recent report published by Reserve Bank of Australia relating to monetary
outlook. The report deals with the past period, current factors that impact the decision of cash rate
and the performance of the economy in the short term and the future outlook of the economy and
how the same shall impact the future outlook. It also highlight the exogenous the factors that impact
the setting of Cash rate and stability in the economy. The following questions have been dealt here-
in-below:
(a) Direction in which the interest rate shall move in the short to medium term tenure of six to
twelve months or it shall remain same in the near term;
(b) State three reasons which shall impact the interest rate in the near term. Further, explain the
stand taken above;
(c) How the budget forecast of the client shall be impacted on account of interest rate
Answer 1
Interest rate implies the rate at which loan is available in the market and it is influenced by
the central bank of the country and is influenced by the following factors:
(a) Market Forces of Supply and Demand;
(b) Inflation in the economy;
(c) Rate of Federal funds implying rate at which central bank (Reserve Bank of Australia)
of the country provides loan to one another for short term period;
(d) Duration of the loan.
(e) Gross Domestic Product and the growth rate of the economy along with vision.
On prima facie review of the Over view of the Australian economy, it can be inferred that
there shall be no change in the cash rate in the near term as stated in the lines quoted in the
RBA report stated here-in-under:
The Reserve Bank Board has for some time been of the view that holding the cash rate steady
at 1½ per cent would support the gradual progress being made on unemployment and
inflation, with steady monetary policy promoting stability and confidence. Higher interest
rates are likely to be appropriate at some point, if the economy continues to evolve as
expected. Given the gradual nature of the improvement, however, the Board does not see a
strong case to adjust the cash rate in the near term. (Reserve Bank of Australia, n.d.)
Conclusion: Interest rate shall remain stable in the short term and there shall be no change
Answer 2
The three reasons for the aforesaid conclusion has been detailed here-in-below:

(a) Steady Growth rate in Gross Domestic Period expected over the next two years and is
expected that it shall be slightly above 3% for 2019 and 2020 and the same shall help in
reducing the spare capacity of the economy. On the basis of the same, unemployment rate
shall fall and the same shall decline to around 5% by 2020. On the basis of above, labour
market shall tighten and there shall be increase in wages and inflation gradually and thus a
stable interest rate shall ease out the same. Further, no rapid change in the economy is
predicted over the next quarters. Further Consumer price Index has been predicted to be
stable at 2.25 over the next year. Thus, the accommodative stance of monetary policy shall
hold good.
(b) The Global Economic Outlook remains positive despite there has been increase in trade
tension on account of trade war between two giant powers i.e. United States of America and
Republic of China. Further trade tension has also escalated between USA and Russia.
However, despite this Australia has performed quite well in terms of Strong Output growth in
the economy. Further, it is expected that the global growth shall remain low over the years on
account of reason stated above. However, it shall remain above the threshold line. Thus, an
accommodative stance at this period of time shall be in favour of Australian economy as it is
not showing a decline. Further, any change can have unpredicted impact on the future growth
of the economy. Further, Australian Dollar has remained stable against the US Dollar on trade
weight basis;
(c) Conditions under the Housing Market has eased over the period in Sydney and Melbourne.
However, the decrease in price from their peak has been modest. However, the restriction in
capacity at Perth can result in constraining the pace at which pipeline can be worked through.
The pace of Housing Price has remained subdued in the other mainland economy. Demand for
housing credit has eased and the overall rate of interest in loan has drifted down over the past
year.
Further, the domestic consumption is expected to hold pace in the coming quarters compared
to fall in the march quarter. Increase in labour market conditions shall add to the growth of
domestic consumption. Further, the Fair Work Commission handed down an increase of 3.5
per cent in minimum and award wage rates from 1 July in its annual review.
Thus, on the basis of aforesaid reason it is expected that market shall remain stable and the
economy interest rate shall also remain stable as there is no need to curb or expand.
Answer 3
On the basis of above, it shall be seen that there is no expectation of change in cash rate or interest
rate in the short to medium term and it has been the largest period in the history of Australian
economy with no such change. Thus, on the basis of the above, there shall be minor to no change in
the budget forecast of the retail investor. However, the money market segment has seen a growth in
the recent quarters and the same may impact the budget estimate of the retailer. On an overall basis
there shall not be a large variance in the budget estimate and the actual estimate provided budget
estimate has been prepared based on current data and economic condition.
Further, the labour cost might go a change and may not be actual to budget estimate on account of
tightening labour market and retail investor can expect some change in that and as far as sales are

concerned they will grow slowly as the GDP growth is forecasted to be slight over three percent in
times to come. The cost of materials shall also be impacted by the same. (Wood, 2018)
Further, the exchange rate shall also remain stable in the short term to medium term and thus there
shall not be a large hit on the variances and the variable rate shall not undergo much change on the
basis of external factors but the same may be influenced by internal factors like creditworthiness of
retailer, duration of loan, collateral, loan to value ratio etc.
References:
Reserve Bank of Australia, n.d. Overview. [Online]
Available at: https://www.rba.gov.au/publications/smp/2018/aug/pdf/00-overview.pdf
[Accessed 4 November 2018].
Wood, G., 2018. 6 Factors That Affect Your Interest Rate. [Online]
Available at: https://www.nextadvisor.com/blog/6-factors-that-affect-your-interest-rate/
[Accessed 4 November 2018].