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 I think that the interest rates will remain the same in the short term but will decrease in the long term. This is because according to the monetary policy statement, the RBA points out that the country remains on track in order to achieve lower levels of unemployment and high inflation for this reason, it is likely that the interest rates will remain the same. Interest rates are able to affect overall GDP performance. When the interest rates are high, it means that the country may be experiencing a monetary contraction policy in order to deduce the money supply in the country. High interest rates may attract lenders to put money in the banks in order to gain from the high interest rates. On the other hand the borrowers will be less likely to borrow money from the banks since the cost of borrowing will be high due to the high cost of borrowing. Since businesses will be less likely to look towards debt to obtain financing, they will either look towards other finance options or may fail to take on any forms of financing. Due to this, it might become difficult for the businesses to expand their operations through increased working capital or acquisition of capital assets. When it is difficult for the business to expand, they are less likely to hire more people or may need to halt operations which is detrimental to the overall economy of the country. For this reason, it
makes more sense if the business is able to access affordable funds through reasonable interest rates which promote borrowing and expansion of business operations in order for the business to hire more people hence having an effect on the overall unemployment level in the country. On the other hand, high interest rates lead to high costs of borrowing. This may make the business transfer the high costs of borrowing on to the customer by increasing the prices of the goods or services which they offer which contributes to high inflation rates. For example given that a wholesaler increases prices to a retailer, the retailer may do the same to the end consumer leading to a chain effect in the supply chain and overall inflation experienced in the country. High inflation rates makes things quite expensive which may reduce capital inflows in the country since purchasing of goo and services may be more expensive compared to purchasing them from other countries which produce the same goods. 2. Write a brief summary highlighting 3 reasons why you think interest rates will do what you think (no more than 300 words) The monetary policy expects that the Australian economy is able to achieve lower unemployment and higher inflation. The RBA expects that GDP will grow to above 3% between the next year or so. In addition, the economy is expected to experience a decline in unemployment which is expected to reach 5% by 2020. Further, the labour market growth might lead to low unemployment a high inflation rates over time. The RBA points out that strong earnings and the expansionary policy are able to support the equity valuation and the corporate bond spreads that are working in the country. From the statement, the RBA aims to maintain the cash rate steady at 1.5% so that they can make progress on the levels of unemployment a d inflation. The RBA hopes that if they maintain the monetary policy
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