Principles of Economics: Monetary Policies and Cash Rate in Australia

Running head: PRINCIPLES OF ECONOMICS
Principles of Economics
Name of the Student
Name of the University
Author Note

1PRINCIPLES OF ECONOMICS
Introduction
The economic conditions and health of economy of any country considerably depend
on the policies and economic strategies which are taken by the governments of the respective
countries, which are designed and implemented with the objective of manipulating and
influencing the dynamics of the vital economic variables, like GDP, inflation, unemployment,
exchange rates and other aspects of the economy of the country (Frank & Cartwright, 2013).
In the contemporary period, especially post Globalisation and trade liberalisation,
most of the major economies of the country being interconnected in terms of economic and
commercial transactions, the economic policies designed and implemented by the
government of a country have considerable and bilateral relationships with the economic
dynamics and conditions as well as economic policies in other countries, having economic,
trade and political relations with the concerned country (Rader, 2014).
Keeping this into consideration, the concerned essay tries to emphasis on one of the
dominant economies in the global scenario, the economy of Australia and focusses on the
monetary policies of the country, the objectives of the same and also tries to analyse the
reasons behind the recent decision of the monetary authority of the concerned country, to
keep the cash rate at an unchanged level of 1.50% in the last two years. For the purpose of the
same the essay refers to the media release statement by Philip Lowe, dated 7th August, 2018
(Rba.gov.au, 2018).
Factors influencing official cash rate of Australia
The macroeconomic indicators are those economic statistics which, being periodically
released by the governments of the countries and which provide insights about the
performance of the economy from different perspectives. The primary macroeconomic
indicators of an economy, usually consists of the following:

2PRINCIPLES OF ECONOMICS
Growth rate of Gross Domestic Product- The GDP of a country showing the total valuation of
the final commodities and services, produced within the boundaries of a country, within a
particular period of time, the growth rate of the same indicates towards the economic
productivity trends of the country over time (Mankiw, 2014).
Inflation- This measures the dynamics of price levels of goods and services in a country.
Unemployment- The unemployment level in a country, showing the dynamics in the number
of people eligible to be employed, but not finding employment, also highlights the conditions
of job creations and overall economic welfare of people in the country.
Exchange rate- This measures the value of the currency of a nation with respect to the
currency of another nation.
On the other hand, the cash rate of Australia refers to the rate of interest which the
Reserve Bank of the country charges from the commercial banks for their overnight loans,
which in turn, directly influences the rate of interest prevailing in the economy.
In general, the cash rate and dynamics of the same, having direct influence on the
interest rate prevailing in the country, has direct negative linkage with the levels of
investment, which implies that with a fall in the rate of interest the investment increases and
vice-versa. Again, with the fall in interest rate, people tend to borrow more money for
consumption and vice versa, which in turn has direct impacts on the price levels or inflation
in a country (Berkelmans & Duong, 2014). The fall in rate of interest can stimulate
consumption, demand and employment generation in the home country but can also lead to
increase in inflation. On the other hand, the cash rate present in a country, also influences the
flow of investment from other countries and also the trade dynamics between the two
countries. High level of interest rate also leads to higher value of the country’s currency
which attracts high investment from other countries (McLaughlin, 2012).

3PRINCIPLES OF ECONOMICS
The relationship between the rate of interest and the investment dynamics in the
domestic currency can be shown as follows:
Figure 1: Investment and Rate of Interest
(Source: As created by the author)
Thus, for taking any decision regarding the level of official cash rate of the country,
the monetary authority of the Australia, needs to consider not only the performance of the
macroeconomic indicators of the country itself (which highlights the level of investment,
consumption and inflation of the country), but also the macroeconomic indicators of other
countries like China, Japan and the USA (Cusbert & Rohling, 2013). While a low cash rate
stimulates the economy, by increasing domestic consumption, money borrowed for
investment, as well as economic production and employment, the same also leads to rise in
inflation in the country. In international front, high interest rate is expected to increase FDI
inflow from the other countries and the value of the cash rate also influence the trade
relationships of the country with its trading partners, mainly China, Japan and the USA. The