Analysis of RBA Interest Rate Decision: ECON7200 Week 10 Assignment

This assignment analyzes the Reserve Bank of Australia's (RBA) decision to maintain the cash rate at 1.5% in April 2019. The decision was based on factors such as a low inflation rate due to falling oil prices, a strong labor market with low unemployment, and wage growth. The RBA's monetary policy objectives, including full employment, stable inflation, and increased investor confidence, influenced this decision. The practical implementation involves the Bank's Domestic Markets Department maintaining money market conditions to keep the cash rate aligned with the target. The expected economic outcomes include continued improvement in the labor market, gradual increases in wage growth, a stable and targeted inflation rate, and reduced unemployment, leading to improved welfare and sustainable development in Australia. The assignment references relevant literature to support its analysis.

Running head: ECONOMIC PRINCIPLES 1
Week 10 Assignment
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ECONOMIC PRINCIPLES 2
Question1
The Reserve Bank of Australia (RBA) made the decision on the cash rate policy to
remain unchanged at a rate of 1.5 percent. This decision was due to the reasonable factors in the
economy. The inflation rate in Australia went down due to the fall in prices for oil. Oil being
used in the transport sector, manufacturing and processing of the goods and services that require
energy; the fall in the oil prices lead to low production costs and distribution of the goods and
services to the markets were also relatively cheaper. The labor market remained strong in the
country where more employment opportunities were available and the unemployment rate
remained at 4.9 percent. The shortage of skilled people in the country contributed to the
availability of vacancies in the job market (Bowman, 2010). The labor market being strong, it
contributed to wages growth in the country which leads to development growth in Australia’s
economy. All these factors and considerations in the economic growth made the RBA Board
remain the cash rate policy unchanged since there is a positive impact on the economy as they
have targeted before (RBA, 2019).
The RBA’s policy aims at reducing the rate of the unemployment (full employment), to
maintain the inflation rate low and stable, to increase the number of investors in the country, to
reduce the rate of government borrowing, increase the living standards (Australian people
welfare), and other economic prosperities in the country. All these objectives made the RBA
Board make their decision on the interest rate to remain unchanged due to how the economy is
progressing after reviewing the given data on each of the objective (Cagliarini, Kent & Stevens,
2010).

ECONOMIC PRINCIPLES 3
Question2
The monetary policy decision in terms of real-life implementation means that the Bank’s
Domestic Markets Department has to maintain the money market conditions (Bernanke et al,
2018). This keeps the cash rate almost to the operating target decision made by the Board by
making sure that banks are availed with funds in the money market. The cash rate in the money
market is determined by the interaction of demand and supply of overnight funds. The shift in
the interest rate results from a change in the operating cash rate target. In order to pursue a
successful cash rate target, the Reserve Bank should control over the supply of funds with banks
use to settle transactions among themselves (exchange settlement funds). The Reserve Bank has
to supply exchange settlement funds at a greater rate than that which commercial banks wish to
hold in order to make the cash rate to fall. For the cash rate to fall, then the Reserve Bank has to
supply more than the. This leads the banks to shed funds through lending more in the cash
market. The Reverse Bank have to maintain their duty for lending in balance and the commercial
banks have to remain in strict in giving the Reserve Banks to supply more to them (Smales,
2012).
So, this decision on implementation plays a major role in the monetary policy since it is
the process that determines the behavior in the state of a nation.
Question3
The expected transmission on the decision on the economic outcome is that the labor
market is expected to continue improving leading to lift in the wag growth in the country. The
Australian dollar has remained narrow and the terms of trade in the country are expected to
increase as it is expected to decline gradually over time. Unemployment is an issue which is a

ECONOMIC PRINCIPLES 4
problem in many countries but in Australia, they expect to reduce unemployment and have more
skilled people in the job market. This will be a gradual change since it will take some time to
train people with the appropriate skills in the job market. Technical schools are supposed to be
built across the country and equip the schools with the required equipment and machines. This
will not be easy if the government doesn’t have the capital for this process, and at the same time,
they need to create more jobs in the manufacturing and processes sectors. This is why the
reduction in unemployment is expected to take place slowly but with time they expect to have
full employment in the country.
The inflation in the country is expected to decline and reach the set target and remain
broadly stable. This is likely to be gradual over time due to lower prices of oil products such as
petrol. Having attained this over time, the Australian people welfare will go up and the
sustainable development will be achieved in the economy (Baffes et al, 2015).

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ECONOMIC PRINCIPLES 6
References
Baffes, J., Kose, M. A., Ohnsorge, F., & Stocker, M. (2015). The great plunge in oil prices:
Causes, consequences, and policy responses. Consequences, and Policy Responses (June
2015).
Bernanke, B. S., Laubach, T., Mishkin, F. S., & Posen, A. S. (2018). Inflation targeting: lessons
from the international experience. Princeton University Press.
Bowman, D. (2010). Interest on excess reserves as a monetary policy instrument: The experience
of foreign central banks. DIANE Publishing.
Cagliarini, A., Kent, C., & Stevens, G. (2010, February). Fifty years of monetary policy: what
have we learned?. In Presentation at 50th Anniversary Symposium of the Reserve Bank of
Australia, Sydney (Vol. 9).
Reserve Bank of Australia. (2019, April 02). 2019 | Interest Rate Decisions. Retrieved from
https://www.rba.gov.au/monetary-policy/int-rate-decisions/2019/
Smales, L. A. (2012). RBA monetary policy communication: The response of Australian interest
rate futures to changes in RBA monetary policy. Pacific-Basin Finance Journal, 20(5),
793-808.