Reserve Bank of Australia Monetary Policy and Interest Rate Analysis

This assignment analyzes the Reserve Bank of Australia's (RBA) monetary policy statement, focusing on interest rate predictions and their impact on a small business client. The student predicts that interest rates will remain stable in the short term but decrease in the long term, based on the RBA's focus on achieving lower unemployment and higher inflation. The analysis explains how interest rates affect GDP, business financing, and inflation, arguing that stable, reasonable rates promote business expansion and employment. The student provides three reasons for the interest rate prediction, highlighting the RBA's goals and expectations. The assignment then outlines the impact of stable interest rates on the client's budget forecasts, explaining how fixed interest costs allow for more effective financial planning, loan acquisition, and business expansion, promoting profitability. The student references the RBA's monetary policy statement and research by Bodenstein, Erceg, and Guerrieri to support the analysis and conclusions.

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

promotes stability and confidence in the country. They highlight that the expectation that the
interest rates may increase in the long term, there is no indication that it is actionable in the
short term.
Further, the RBA is interested to ensure that the economy is stable by maintaining the cash
rate and therefore the interest rates are expected to remain the same. In the case of real estate,
it is expected that the country will have a positive outlook since the growth has been reported
to be steady and slow.
Unless the country experiences foreign shocks, it is unlikely that the interest rates will
fluctuate in the short term.
Explain to the client what impact this might have on their budget forecasts and how.
(no more than 200 words)
When the interest rates are made to be steady, it is expected that in the short term that the
budget should remain fixed. This is because the interest charges from any loan amounts are
expected to remain the same over a long period of time. The company is able to forecast the
amount of money that they require to make interest payments over time. Since it remains a
fixed cost for the business (Bodenstein & Guerrieri, 2017).
Because the interest costs are fixed and low, the business can plan effectively for the future
cash flows in the business. The business will be able to undertake more loans and expand its
business operations. In this way, the business is able to effectively increase its level of
profitability through finding new markets of operation and paying off their loan interests.
Through a certain projection of the level of cash inflows and outflows, the business is able to
plan effectively and forecast on some of the expenses that it may face over the next period of
time.

References
Bodenstein, M., Erceg, C. J., & Guerrieri, L. (2017). The effects of foreign shocks when
interest rates are at zero. Canadian Journal of Economics/Revue canadienne
d'économique, 50(3), 660-684.
Statement of Monetary policy (2018), Reserve Bank of Australia, retrieved from
https://www.rba.gov.au/publications/smp/2018/aug/