Ministerial Brief: Interest Rates and Regional Economies in Australia

This ministerial brief provides an analysis of the Australian economy, focusing on the impact of interest rates on economic growth. It examines the current economic conditions, including GDP growth, employment rates, and inflation. The brief explores the Reserve Bank of Australia's monetary policy, particularly its decision to maintain low interest rates, and discusses the strategic context of these decisions. Furthermore, it investigates the effects of these low interest rates on two key regions: the State of Victoria and Western Australia. The analysis includes the use of the IS-LM framework to illustrate the impact of interest rate changes on investment and consumption, ultimately influencing productivity in both regions. The report concludes by projecting the potential future impact of these policies on the Australian economy as a whole.

Running head: MINISTERIAL BRIEF
Ministerial Brief
Name of the Student
Name of the University
Author Note

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Table of Contents
Projection of future rate on interest: Australia................................................................................2
Purpose:.......................................................................................................................................2
Strategic Context:........................................................................................................................2
Effects of low rate of interest on the economy of two regions:...................................................3
a) State of Victoria:......................................................................................................................4
b) Western Australia:...................................................................................................................5
Technical Appendix:....................................................................................................................6
References........................................................................................................................................7

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Projection of future rate on interest: Australia
Purpose:
The overall purpose of the ministerial brief is to discuss about the current growth of the
economy of Australia, in terms of different macroeconomic indicators. The purposes are detailed
as follows:
 The current interest rate levels prevailing in the economy (Plumb, Kent and Bishop 2013)
 The projected rate of interest which is expected to prevail in Australia in the coming
years
 The impact of the expected interest rate on the economy of two regions: State of Victoria
and Western Australia
Strategic Context:
 The Australian economy, after experiencing the economic crisis and its negative impacts in
the last few decades, has started gaining back pace in its economic growth in the last few
years. This is reflected in the GDP statistics of the country in the last few years.
 The current growth rate of GDP has been more or less near 3% and according to the forecast
of Reserve Bank of Australia, the rate is expected to remain at the same level for the coming
years (Dyster and Meredith 2012).
 The growth rate of employment rate has gained impetus in the recent months in the country,
which implies that apparently the household consumption is expected to increase in the
country. However, the overall consumption rate has not shown substantial increase due to the
prevalence of low real wage rates in the economy as a whole, barring few exceptions.

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 The interest rate in the economy, in an overall framework has decreased in the recent years
and the Reserve Bank of Australia has decided to keep it low. It has decided to keep the cash
rate at a low rate of 1.50 per cent. This has been mainly done to facilitate the economic
growth that the country is currently experiencing and to facilitate the increase in the
investment levels (McLean 2012).
 The inflation rate, experienced by the country, unlike most of the growing economies, has
been running low, under two percent. Though the current rates of inflation are low, the rates
are expected to pick up slowly over time, due to the presence of price rises in power sector,
especially electricity prices and that of the tobacco consumption sector. However, the entry
of new players in the retail industry is expected to act in the opposite direction and take the
inflation rate down (Kumar, Webber and Perry 2012).
 The Australian dollar has recently appreciated and is in turn resulting in the lower price
levels of the economy. However, if the exchange rate remains at the same level, then in
future this is expected to create stagnancy in the economic activity as a whole in the country,
apart from keeping the inflation rates low (Rba.gov.au, 2017).
Effects of low rate of interest on the economy of two regions:
In general, the rate of interest of a country is kept at a low level in order to facilitate
investment in the country, as these two variables are inversely related. When a country
experiences economic boom, with lot of productive and investment activities going on in the
economy, investments coming in from domestic as well as international sources, the monetary
authority of the country tries to keep the rate of interest at low levels to facilitate investments in
different sectors of the economy. In this context, the impact of the projected low rate of interest
on the economy as a whole of two regions, Victoria State and Western Australia is discussed:

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a) State of Victoria:
The State of Victoria, being one of the largest state economies in Australia and one of its
central commercial zones, is currently experiencing significant economic growth with the Gross
State Product of the state, increasing by 3.5 per cent (2016). Much of this growth rate is
attributed to the significant increase in the non-mining business activities in the state and an
overall increase in the aggregate demand scenario. Residential investment has also grown
significantly in this state, following a huge increase in the population growth over the last few
years. The other business investments, whose growth has contributed to the economy’s progress
in the recent years, are the technical and professional services, financial sector and insurance
services (Dyster and Meredith 2012).
Projected impact of expected low interest rate:
With the no-mining business sector forming the largest share of the economy of the State
of Victoria, the future projection of low and steady rate of interest, if maintained by the monetary
authority of the country, is expected to boost up the investment levels in commercial sector of
the State of Victoria significantly. The economy of the state, already experiencing high business
investments in different non-mining sectors, especially residential ones, due to increase in
population, will see even more investments in future. The high population growth and high
employment is also expected to increase the aggregate consumption. This will increase the
overall productivity of the state, as can be shown with IS-LM Model. (See Technical Appendix).

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b) Western Australia:
The economic growth of this region, unlike that of Victoria, has decreased in the current
period, due to significant disinvestment in the mining sector, mining comprising of the largest
business activity the state. The consumption expenditures, however, has not decreased
significantly, unlike most of the other states in the country, due to the presence of high and
consistent employment trends, most of which is generated from the mining industry (Downes,
Hanslow and Tulip 2014) .
Projected impact of expected low interest rate:
With the expected interest rate supposed to be stable at low levels, there are hopes for
recovery of the business sector of the economy and of the consumption demand of the household
sector as a whole. The current economy facing a down turn , due to the disinvestment in the
mining and other sectors, is expected to turn around with the low levels of interest rates in future.
This is because, due to low levels of rate on interest, the economy may attract high investment in
these sectors, thereby having positive impacts in the economy (Barro 2013). The aggregate
consumption is also expected to increase, which together with higher investment is expected to
increase the productivity of the economy, by IS-LM Framework (See Technical Appendix).

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Technical Appendix:
The above phenomenon can be supported with the help of ISLM Framework, according
to which, a fall in the rate of interest leads to an increase in the level of investments, thereby,
increasing the aggregate demand side of the commodity market. The increase in consumption
expenditure also leads to a rise in aggregate demand. Together this increases the aggregate
supply, thereby bringing the market to new equilibrium. Due to a fall in the interest rate, money
demand will also increase, which will shift the LM curve toward right. Together, the IS and the
LM curve shifts will increase the productivity of both the economies of the concerned regions
(Young and Zilberfarb 2012).
.
r LM1
r0 IS0 IS1 LM1
r1
I I1 I0 0 Y0 Y1 Y2 Y
Figure 1: Shift in the IS and LM curves

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(Source: As created by the author)
References
Barro, R.J., 2013. Inflation and Economic Growth. Annals of Economics & Finance, 14(1).
Downes, P.M., Hanslow, K. and Tulip, P., 2014. The effect of the mining boom on the Australian
economy.
Dyster, B. and Meredith, D., 2012. Australia in the global economy: Continuity and change.
Cambridge University Press.
Dyster, B. and Meredith, D., 2012. Australia in the global economy: Continuity and change.
Cambridge University Press.
Kumar, S., Webber, D.J. and Perry, G., 2012. Real wages, inflation and labour productivity in
Australia. Applied Economics, 44(23), pp.2945-2954.
McLean, I.W., 2012. Why Australia prospered: The shifting sources of economic growth. Princeton
University Press.
Plumb, M., Kent, C. and Bishop, J., 2013. Implications for the Australian economy of strong growth in
Asia. Reserve Bank of Australia.
Rba.gov.au (2017). 1 August 2017 | Minutes of the Monetary Policy Meeting of the Board | RBA.
[online] Reserve Bank of Australia. Available at: https://www.rba.gov.au/monetary-policy/rba-board-
minutes/2017/2017-08-01.html [Accessed 6 Sep. 2017].
Young, W. and Zilberfarb, B.Z. eds., 2012. IS-LM and modern macroeconomics (Vol. 73). Springer
Science & Business Media.