Considerations for Cash Rate Decisions

This article discusses the factors considered by the Reserve Bank Board (RBB) when making decisions regarding the cash rate. It explores the impact of inflation, unemployment, wage growth, household debt, and more. The RBB aims to achieve consumer price inflation of 2-3% per year over the medium term. The article provides insights into the monetary policies implemented by the RBB.

Considerations for Cash Rate Decisions 1
CONSIDERATIONS FOR CASH RATE DECISIONS
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Considerations for Cash Rate Decisions 2
CONSIDERATIONS FOR CASH RATE DECISIONS
Introduction
The Reserve Bank Act (RBA) (1959) mandates the Reserve Bank Board (RBB) in
Australia to undertake monetary policies in a manner that in RBB’s opinion, contributes to AUD
currency stability, full employment maintenance and welfare and economic prosperity of
Australians (McCredie, Docherty, Easton and Uylangco 2016). These three objectives enables
RBB to emphasize on currency (price) stability that is vital precondition for lasting growth of
economy alongside employment as it consider implications of monetary policy (MP) for short-
term activities and levels of employment. RBB aims at achieving the consumer price inflation
(CPI) of 2-3% per year over the medium term. Cash rate (CR) remains the MP’s instrument in
Australian and all decisions regarding cash rate are made by RBB that meets 11 times per annum
every first Tuesday of month apart from January. Thus, this paper uses the information drawn
from the meetings’ minutes and associated statements by government including 8 Nov 2006, 8
Oct 2008, 3 Nov 2010, 3 August 2016 and 3 April 2019 minutes and statements to critically
analyze the specific considerations RBB take into account when making decisions regarding the
cash rate.
Considerations Affecting Cash Rate Decisions
The RBB implements the MP by undertaking transactions in local money markets. Such
transactions are primarily carried out in the auction after the public announcement to every
commercial bank that Central Bank (CB) intends to purchase or sell cash (McCririck and Rees
2017). A price that any commercial bank is willing to pay will determine who is (not), successful
in getting cash. Such aan auction approach is known as the “Open Market Operations” or OMO.

Considerations for Cash Rate Decisions 3
The implementation of MP is understood in terms of five aspects of cash market which include
price, quantity, supply, and demand as well as policy interest rate corridor.
From the overhead mentioned minutes and statements, various factors are considered by
RBB in cash rate or interest rate determination. These factors include inflation, unemployment,
wage growth, household debt, AUD, overseas demand and consumer confidence index (CPI).
MP decisions get expressed as a target for CR that is the overnight money market IR. After every
RBB’s meeting, a media release gets issued at 2:30 PM announcing alterations in CR target
effective the next day.
Inflation
Inflation refers to the general rise in prices of goods and services. When it takes place,
consume purchasing power (CPP) gets diminished as the living cost has surged (Makin, Robson
and Ratnasiri 2017). RBA keenly monitors inflation and always considers figures of inflation
when making decision about the movements of interest rate (IR). Where the RBA believes
inflation stays extremely high, it will increase IR to slow growth of economy, and RBA trusts
inflation is extremely low, it will reduce IR to enhance growth of economy. For example, in the
minutes of meeting held on 3 Oct 2006, inflation was a key consideration for MP. The minutes
showed that the main international factors that the RBB considered in its recommendation to
surge the CR of 25 basis points to 6.25% in November 2006 were that the board believed that
growth would continue at beyond-average in the year 2007, despite the slowing in the United
States.
On local perspective, the Board indicated that even though the effects of previous surges
in CR in Australia were yet to reflect their full impact, it projections for underlying Australian
inflation was for it to hover around 3% over the next two years. Thus, the RBB considered that

Considerations for Cash Rate Decisions 4
such an extreme high commodity prices levels were continuing to add to local incomes alongside
expenditure, and capacity utilization stood at record levels while labour market stood tight. This
made the RBB to take careful consideration of the probable economic impacts of drought and
noted that it was not likely to affect substantially medium-term inflation outlook. The RBB was
thus convinced and decided that inflation risk surpassing 2-3% in medium run stayed significant.
RBB believed that more stringent policy stance achieved by taking certain pressure off demand
would work to boost the prospects pulling inflation down towards 25% in due course.
The RBB members further discussed the pros of tightening by fifty basis points, provided
that effect on inflation of a mere single 25 basis point tightening was usually believed to stay
modest. It was then decided by members that smaller shift would be suitable, for many reasons.
First, the inflation effect would display accumulation of 3 tightening in year 2006, and there
remained a degree of uncertainty as to how well projections stood capable of accounting for
previous measures. This is a typical case of how inflation is used to make decisions on the cash
rate, in this case, extreme inflation in year 2006 led to the decisions by RBB to increase CR by
25 BPs to 6.25%, effective the next day.
According to the minutes of the meeting held on 7 October 2008, the inflation was also
used to decide the CR decisions whereby the RBB decided to decrease cash rate by 100 BPs to
6.0%, effective 8 October 2008. This followed the RBB’s consideration of the latest economic
as well as financial market developments and reached a decision that significant change to
balance of risk around Australian growth outlook alongside inflation implied that a substantially
less stringent MP stance stood suitable. The RBB recognized that the then IR levels implied the
MP had a substantial capacity of stimulus provision. Thus, members of the board assessed the
recommendation and observed that 100BPs easing would serve to bring certain easing markets

Considerations for Cash Rate Decisions 5
had then priced in next months. The surged downside risks to growth alongside the improved
lower inflation prospects implied that there stood a strong economic case to support the decision.
Unemployment
RBA considers the rate of unemployment when making decisions regarding the cash rate.
For instance, when the RBA observes that unemployment stays extremely high, a likelihood of
cutting cash rate is high to help the business to expand further and hence creating more jobs
(Brown and Karpavičius 2017). The full employment is about five percent. In the minutes of the
meeting held on 7/10/2008, unemployment was used to make the decision to lower the cash rate
to 6.0%. This followed the RBB assessment of the labor market whereby the member observed
that the gradual slowing in trend employment growth had endured over the previous month.
Statistics indicated that such a slowing patterns stood most prominent in NSW as relative to
other states in Australia though data on employment by state stood quite volatile. The RBB
further noted that job advertisements had been declining over the previous six months, with job
advertisements in newspapers sharply lower. The board believed that such statistics implied
additional slowing employment stood in prospects. Therefore, the board had to lower the cash
rate to allow firms to expand and create more jobs in Australia.
International Economic Conditions
The RBA considers the strength of the bigger global economies. This include how
overseas housing markets, consumer demand as well as currencies perform. RBA would consider
the strength of the US, China alongside other bigger European economies to be of specific
significance. For instance, the minutes of the meeting held on 3/10/2006 considered the
international conditions of China, euro area and the US to increase the cash rate. This
consideration helped the Board to deduce that the global economy had strongly grown in the year

Considerations for Cash Rate Decisions 6
2006 and stood generally anticipated to grow at beyond-average in the year 2007. The RBA
noted that despite the US recent moderation, firm conditions stood prevailing in other world
economies like China and in euro area. Such a global expansion was noted by the RBA as a
contributor of higher commodity prices levels that continue to add incomes as well as
expenditure in Australia. Thus, the RBA had to adopt a more restrictive position of MP to
moderate inflation over a period and hence secure sustainable growth.
Wage Growth
The RBA considers the wage growth when deciding on the cash rate levels. A weaker
wage growth remains a vital consideration for the RBB (Loukoianova, Wong and Hussiada
2019). This is because in the high wages absentia, households’ consumption gets restricted. The
growth in the debts of household has been quick and wage growth has never been increasing to
same degrees as housing inflation. Therefore, for the Australian economy to get strengthened,
wage growth should catch up with the growth in house price. These are impeding concerns
factors for inflation. In the 3 Nov 2010 statement, the board used the wage rate raise the cash rate
by 25 BPs to 4.75% since the wage growth had somewhat picked up following the substantial
plunge in the previous year and the RBA believed that wage growth rate would surge over the
next year. For 8 Nov 2006 minutes, RBA considered wage growth which had continued to grow
exponentially at quicker-than-average pace to adopt restrictive MP thus increasing cash rate to
6.25% by 25 basis points to ensure growth sustainability.
Household Debt
The RBA takes into account the household debt when deciding on whether to raise or
plunge the cash rate. Lower rates of interest historically tend to improve housing prices in capital
cities business sites. Therefore, the phrase “bubble” is being utilized in describing the Sydney

Considerations for Cash Rate Decisions 7
housing market (Baur and Heaney 2017). Additional levers like restricting lending for housing
investment alongside general lending requirement tightening might get more effective when
controlling Australian housing market. From the minutes of 2/11/2010, RBA considered
household debt to raise CR to 4.75% by 25 basis points. This was because in the housing market,
conditions had already softened compared to previous year, with national housing pries widely
flat over the latest months. Rates of auction clearance stood about long-term average levels.
Approval for loans already drifted down during the year and housing credit growth had become
moderate over latest months. Additional household credit forms were already flat lately while
liaison with retailers had experienced a pick-up in payment of cash comparative to credit cards.
Australian Dollar
The AUD is also being considered when making decisions about increasing or lowering
the cash rate. The RBA attempts to influence the AUD strength or otherwise through official
cash rate (Manalo, Perer and Rees 2015). Where the CR stays high relative to other western
economies, it will strengthen the AUD as investors seeking yield will invest into Australia.
Whereas a strong AUD is good for importers, it is severe barrier to exporters. The RBA thus
closely monitors the AUD and subsequently adjust the cash rate according to the rate of
exchange’s performance. Where the CR is extremely high, the RBA believes it will urge
investors to invest in AUD thereby pushing the rate of exchange high. If AUD is too extremely
high, Australian exporters shall get it quite challenging to remain competitive in the global
markets since their commodities would become more expensive relative to other economies.
From the minutes of the minute held on 2/08/2016, RBA considered the AUD against other
currencies (the USD, Japanese Yen, euro, Chinese renminbi) to lower the CR by 0.25 percentage
points to 1.5%. The Australian dollar rate of exchange had appreciated somewhat since the early

Considerations for Cash Rate Decisions 8
period of the year. This is because the low rates of interest and AUD depreciation since year
2013 were anticipated to continue to back up the essential adjustments in Australian economy
after the closure of investment boom, however, appreciating rate of exchange was expected to
trigger complications.
CPI
The RBA has to consider the CPI as a critical indicator of the degrees of optimism
consumers feel regarding their personal financial conditions (Chortareas and Noikokyris 2017).
Consumers shall spend their money on goods as well as services that boost economic growth
when confidence stays high whereas low confidence implies high likelihood of savings amongst
consumers and hence hampering the growth of economy. From the minutes of the meetings held
on 3/10/2006, RBA used the data on CPI for September quarter to increase the cash rate because
the CPI data demonstrated that inflation had stayed comparatively high (0.7% in the quarter) and
3.9% over 2006. It was thus clear that underlying inflation had surged because the start of year
2006 and recent quarters had run at yearly rate of about 3%.
Conclusion
The paper has discussed the factors RBA considers when determining the cash rates.
These factors include wage growth, household debt, inflation, unemployment, consumer price
index, Australian dollar and international economic conditions. The minutes and statements have
helped demonstrate how these factors are used by the RBA when determining the CR.

Considerations for Cash Rate Decisions 9
References
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Loukoianova, M.E., Wong, Y.C. and Hussiada, I., 2019. Household Debt, Consumption, and
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