Impact of Low Interest Rates on Australian Dollar and International Trade

Australia
economy

Table of Contents
Discussion of how low interest rates may affect the Australian dollar and the level of
international trade........................................................................................................................3
Discuss why low interest rates may in fact lead to an increase in inflation over time................3
How alternative microeconomic reform such as tax reform may be needed in the post-COVID
world to improve economic outcomes for Australia...................................................................4
CONCLUSION................................................................................................................................5
REFERENCES................................................................................................................................6

Discussion of how low interest rates may affect the Australian dollar and the level of
international trade
Australia is having floating exchange rates and it means that the movement in Australian
dollar exchange rate is depending upon demand and supply. Australia is trying to trade with
China and the reason behind this is the pandemic (Barnes, 2018). At the start of this pandemic,
Australia was having opportunity to emerge with China for the economic stability. The Reserve
Bank of Australia announced that keeping cash rate benchmark will lead to a rate cut due for the
overall economic picture and it will not make any kind of gain. Agriculture, manufacturers as
well as other exporters are suffering as the Australian dollar is continuing to push true highs in
the commodity pricing. this dollar rose up to 10% against the greenback in the year 2020. The
rise against you US is continuing to grow (Chan, 2020). The tourism and education sectors of
Australia are vulnerable due to the rising Australian dollar. There are retailers and other
exporters who are benefiting from great purchase and power abroad. The RBA seeks to manage
inflation below two and three percent over the period across the business downturn, as confirmed
by the Deputy Prime Minister and the Governor in the Sep. Report on the Conduct of Money
Creation. This means that the RBA will boost interest rates if the economy is functioning well
and inflationary pressures are mounting. When the economy is deteriorating and inflationary
pressures are receding, on the other side, the RBA will cut interest rates. The exchange rate is
affected by changes in Australia's interest rates. Because Australian interest rates are high in
comparison to other countries' interest rates, capital inflows tend to rise as international investors
seek larger returns. As a result, demand for AUDs rises, putting upward pressure on the
exchange rate. Low Australian interest rates relative to overseas interest rates, on the other hand,
cause capital outflows and put downward pressure on the currency rate.
Discuss why low interest rates may in fact lead to an increase in inflation over time