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

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. [ CITATION Res181 \l 1033 ]
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: