Impact of Reserve Bank of Australia Monetary Statement on Interest Rates

The Reserve Bank of Australia plans to keep the cash rate steady at 1.5% to support progress on unemployment and inflation. The economy is expected to experience a decline in unemployment and a little above 3% GDP growth between 2018 and 2019. The real estate industry growth has been steady and slow, making it unlikely for the RBA to increase the cash rate. As a result, budget forecasts for small businesses are expected to remain steady as well. This means that the interest charges of any current loans remain steady over a period, allowing businesses to project the amount of money that it is likely to use for interest payments. The business can also plan for a cash inflow using a bank loan given that the loan rate is quite low and the loan can help the business further its agenda and grow.

Refer to the Overview of the most recent Reserve Bank of Australia Monetary
Statement. See www.rba.gov.au > publications>
Consider any developments in the economy since February by reviewing the minutes of
the monetary policy meetings of the Reserve Bank Board
Pretend that a small business client has asked what you think will happen to interest
rates over the next 6-12 months. This client is an importer of retail goods and has a
significant variable rate loan. Based on your readings:
1. Decide which direction you think interest rates will move or if you think they will
remain the same
2. Write a brief summary highlighting
3 reasons why you think interest rates will do what you think (no more than 300 words)
According to the monetary policy statement, the Australian economy remains on track in its
achievement of lower unemployment and higher inflation over time. The RBA expects that
the GDP growth to be a little above 3 percent between 2018 and 2019, hence reducing spare
capacity. Overall the economy is expected to experience a decline in unemployment
forecasted to reach 5 percent by 2020. However, it is also expected that as the labour market
tightens, the wage growth and inflation will also increase. Strong earnings and expansionary
policy settings have been able to support equity valuations and corporate bond spreads in the
country. The RBA plans to keep the cash rate steady at 1.5% in order to support the progress
on unemployment and inflation. It has the view that the steady monetary policy will promote

stability and confidence. Though there is expectation of higher interest rates at some point
however there is no strong case to adjust the cash rate in the near term.
I therefore think that while the business should expect a higher interest rate in the future. It
may be after a year and not less than that. This is because the RBA is set cast on ensuring that
there is stability in the economy and the only way it can be able to do that is if the minimum
cash rate is maintained at 1.5%.
Also, the real estate industry growth, in Australia has been steady and slow. This has been a
positive outlook for that industry which has the propensity of growing faster than it normally
should, for this reason it is unlikely that the RBA will increase the cash rate.
Unless Australia experiences some level of shock in the money market or in the economy in
general, it is unlikely that the interest rates will change any time soon.
Explain to the client what impact this might have on their budget forecasts and how.
(no more than 200 words)
Since the interest rates are expected to be steady, budget forecasts are expected to be steady
as well.
This means that the interest charges of any current loans remain steady over a period. Hence
the company is able to comfortably project the amount of money that it is likely to use for
interest payments. In addition, the business can also project any interest earnings that it
should expect over a period of time (Stiglitz & Rosengard, 2015).
Also, the business can plan for a cash inflow using a bank loan given that the loan rate is
quite low and the loan can help the business further its agenda and grow. With increase in

growth and expansion ventures, the business will b able to experience increase in profitability
and pay off loan interests as and when they accrue.
The business is therefore able to project with certainty the level of cash inflows and cash
outflows that it expects from the business during budgeting. In this way the company is able
to undertake more loans or get investment which will support its growth.
References
Statement of Monetary policy retrieved from
https://www.rba.gov.au/publications/smp/2018/aug/
Stiglitz, J. E., & Rosengard, J. K. (2015). Economics of the public sector: Fourth
international student edition. WW Norton & Company.