Macroeconomics 13: Current Monetary Policy Stance of RBA Report

This report examines the current monetary policy of the Reserve Bank of Australia (RBA), focusing on its impact on the Australian economy. The RBA's monetary policy stance, including the benchmark cash rate, is analyzed, along with its effects on inflation, exchange rates, and economic growth. The report reviews previous research on monetary policy, providing context for the current situation. Data analysis explores the impact of the policy on small and medium-sized enterprises (SMEs), exchange rates, and inflation. The report also includes future projections of the RBA's monetary policy, considering potential interest rate changes. The analysis highlights the RBA's role in maintaining monetary supply and demand, price stability, and credit control. The report concludes with a summary of the key findings and their implications for the Australian economy.

MACROECONOMICS 1
The current monetary policy stance of the Reserve Bank of Australia
Student’s Name
Course ID
University
Date

MACROECONOMICS 2
Executive summary
The Australian Monetary Policy stance governed by the Reserve Bank of Australia has
played a major role in maintaining significant monetary supply and demand, price stability of
commodities, credit control, and develops a suitable interest rate framework. In the last minute of
the RBA Monetary Policy, the central bank of Australia kept the benchmark cash rate at 1.5
percent. In the monetary policy statement, the RBA has also clarified that the falling strength in
the Australian dollar can create an adverse impact on inflation and economic growth status.
Additionally, the fall in the interest rate has resulted in an increase in the flow of money that
further led to an increase in the inflation rate. However, it is forecasted by several economists
that the RBA will increase in the interest rate to 3.5 percent in the future in order to maintain a
balance in the economy.

MACROECONOMICS 3
Table of Contents
Introduction......................................................................................................................................4
Previous Research............................................................................................................................4
Current Monetary Policy of the Reserve Bank of Australia............................................................6
Data Analysis...................................................................................................................................7
Future Projection...........................................................................................................................10
Conclusion.....................................................................................................................................11
References......................................................................................................................................12

MACROECONOMICS 4
Introduction
The study describes the current Australian Monetary Policy and its impact on inflation,
exchange rate, and economic growth as well as the industrial growth of the nation. The Reserve
Bank of Australia (RBA), the central bank of the nation has been accountable for the monetary
policy stance in Australia. The study identifies the previous research conducted by the
economists and the scholars on the monetary policy of the nation to find out how the policy has
contributed towards the several economic aspects such as interest rate, price stability, inflation,
and debt management, etc (Tuan, 2012). In the research study, the existing monetary policy of
the RBA has been discussed thoroughly so that the role, as well as the long-term effect of the
policy measure, can be evaluated. Precisely, in the data analysis segment, the impact of the
monetary policy stance on several economic indicators has been analysed as well. To finish, the
future projection of the monetary policy of the RBA has been proposed.
Previous Research
In terms of previous research done on the subject of monetary policy, a review of the
research of Manalo, Perera, and Rees (2014) can be presented. According to the research study
of the trio, Australian monetary policy has subsequently contributed to control the swings in the
exchange rate. By considering the theoretical concept, exchange rate movement has been the
major contributor towards price fluctuation of domestic as well as international products and
services as relative prices have been fluctuated due to change in the exchange rates as shown in
figure 1.

MACROECONOMICS 5
Figure 1: Real Exchange Rate
Source: (Manalo, Perera and Rees, 2014)
As a result of the consequences, inflation rates and interest rates of the economy have
been changed. Clinically, an effective monetary policy stance can control the exchange rate
movements so that price stability has been maintained throughout the economy. In another
research study related to Australian monetary policy, Gillitzer and Simon (2015) have criticised
how inflation target of the RBA has created several issues towards economic growth. According
to the study paper, monetary policy of the RBA has been accountable for setting inflation targets.
Significantly, the study reviews the inflation trend of the Australian economy over the previous
25 years to identify how changes in inflationary process can affect the monetary policy of the
Australian central bank (Gillitzer and Simon, 2015). Furthermore, the research dictates that
financial stability as well as price stability has been the leading agenda to be considered in the

MACROECONOMICS 6
monetary policy so that the RBA can control meet the inflation target improving the job market
scenario and economic growth rate as well.
Current Monetary Policy of the Reserve Bank of Australia
In the current Monetary Policy Statement of the RBA, the Australian central bank has
kept the benchmark neutral cash rate at 1.5 percent which can be identified as a record low (Lee,
2017). The benchmark rate decision of the RBA has been come within the expectations of the
economists as the Australian central bank has maintained unchanged benchmark rate following
the previous trend in 2016 and 2017 (Joiner, 2017). Notably, the RBA has been kept the
benchmark rate at 1.5 percent since 2016 as shown in the figure 2.
Figure 2: Australia Neutral cash Rate
Source: (Joiner, 2017)

MACROECONOMICS 7
In the Monetary Policy Minute, the RBA stated that the Australian economy is continued
to evolve at the broader level according to the expectations. The latest policy statement has
featured different forecasts to that of in May. In the latest Monetary Policy Statement, the RBA
has claimed that the Australia economy has been expected to expand at around three percent per
annum in the next two years. On the other hand, the unemployment rate has been estimated to
come down a tag lower. In terms of inflation targets, it is expected that the inflation in Australia
will reach 2 percent by the end of 2017. Following the upward trend, the inflation target has been
revised to 2-3 percent in the next year or so (Reserve Bank of Australia, 2017). The RBA
governed Monetary Policy Statement has also featured the impact of strength in the Australian
dollar on economic growth. According to the RBA, the strength in the domestic currency can
weigh on economic growth and inflation. Evidently, a rising Australian dollar will create
significant downward pressure on inflation that can be a concern in the near future (Lee, 2017).
Data Analysis
The primary impact of the current monetary policy of the Reserve Bank of Australia can
be seen over the industrial growth of the Small and Medium Scale Enterprises (SMEs). The low
rate of interest rate has enabled the small and medium scale entrepreneurs to get easy access to
loan that increases the flow of money in the market (Campbell, 2015). Additionally, the low
interest rate enforces the Australians to invest the money in the market in place of keeping their
money safe in bank deposits (Thorbecke and Coppock, 2008). Hence, a hike in the growth rate of
SMEs can be evident in the Australian market since 2014. A figure has been presented herein
below for better understanding:

MACROECONOMICS 8
Figure: Growth of SMEs in Australia (2014 – 2016)
Source: (Salt, 2017)
It can be seen from the above figure that SMEs in education and training sector have
grown by around 11 percent between 2014 and 2016. On the other hand a growth of 10 percent
can be seen in the rental, hiring and real estate services industry (Salt, 2017). Additionally, a
growth of 8 percent can be evident in financial and insurance services, arts and recreation
services, and food and accommodation industry (Salt, 2017). However, a negative growth can be
evident in the manufacturing, retail trade and mining industry due to their large scale of
operations.

MACROECONOMICS 9
Furthermore, the fall in the interest rate has made the Australian dollar highly available in
the market. For instance, the low rate of interest rate of 1.5 percent due to the current monetary
policy of the Reserve Bank of Australia has increased the flow of money in the market. On the
basis of the excessive supply of money in the market, a fall in the price of Australian Dollar can
be evident in the recent times resulting in a fall in the exchange rate (Cobham, 2015). A figure
has been presented herein below for better understanding:
Figure: AUD Vs USD (Exchange Rate)
Source: (Tradingeconomics.com, 2017)
It can be seen from the above figure that the exchange rate of Australian Dollar has fallen
in the last two years from 0.95 to 0.70. However, the current exchange rate is around 0.79623 in
the recent time (Tradingeconomics.com, 2017). Hence, the low rate of interest rate has made

MACROECONOMICS 10
Australian Dollar weaken in the international market. On the other hand, a hike in the inflation
rate can be seen in the last 2 years due to the fall in the interest rate in the Australian economy.
As the flow of money increases in the market, the purchasing power of the buyers also increases
(Swamy and Tavlas, 2009). Hence, a rise in the inflation rate from 1 percent to 2 percent can be
evident in the Australian market occurring due to demand pull inflation (Tradingeconomics.com,
2017). A figure has been presented herein below for better understanding:
Figure: Inflation in Australia
Source: (Tradingeconomics.com, 2017)
Future Projection
According to the current beliefs of the economists, one more interest rate cut is expected
to be made by the Reserve Bank of Australia by the end of 2017. It is assumed that the RBA will
reduce the interest rate to 1 percent by the end of 2017 in order to promote wages growth,
household spending and employment (Ryan, 2017). However, the economist predicts that the

MACROECONOMICS 11
interest rate will increase up to 3.5 percent by the end of 2020 (Ryan, 2017). The major reason
for the hike of interest rate is the increasing inflation in the Australian economy and falling
exchange rate of Australian Dollar. The hike in the interest rate will help the Reserve Bank to
control the flow of money in the market and reduce the purchasing power of the consumers
resulting in a controlled inflation rate in the Australian economy. However, the increase in the
interest rate will negatively impact the growth of SMEs in the economy.
Conclusion
By considering the above analysis, Australian Reserve Bank has effectively made
changes in its monetary policy to control the flow of money and promote business in the nation.
The recent fall in the interest rate to 1.5 percent has helped the RBA to increase the growth of
SMEs in the nation. Additionally, the fall in the interest rate has helped to control the falling
inflation rate in the market. It is expected that the interest rate will increase in the upcoming
future to reduce the flow of money in the Australian market that will help the government to
control the rising price of commodities and fall value of Australian Dollar.

MACROECONOMICS 12
References
Campbell, J. (2015). Asset prices and monetary policy. 4th ed. Chicago: University of Chicago
Press.
Cobham, D. (2015). Monetary Analysis and Monetary Policy Frameworks: Introduction. The
Manchester School, 83, pp.1-4.
Gillitzer, C. and Simon, J. (2015). Inflation Targeting: A Victim of Its Own Success?. [online]
Reserve Bank of Australia. Available at:
http://www.rba.gov.au/publications/rdp/2015/2015-09/introduction.html [Accessed Sep. 2017].
Joiner, D. (2017). 'Monetary policy: too much, for too long' | The New Daily. [online] The New
Daily. Available at: http://thenewdaily.com.au/money/finance-news/2017/08/11/monetary-
policy-too-much/ [Accessed Sep. 2017].
Lee, Y. (2017). Australia's central bank keeps policy rate, says local currency's strength to
weigh on growth. [online] CNBC. Available at: https://www.cnbc.com/2017/07/31/reserve-bank-
of-australia-monetary-policy-decision.html [Accessed Sep. 2017].
Manalo, J., Perera, D. and Rees, D. (2014). Exchange Rate Movements and the Australian
Economy. [online] Reserve Bank of Australia. Available at:
http://www.rba.gov.au/publications/rdp/2014/2014-11/introduction.html [Accessed Sep. 2017].
Reserve Bank of Australia. (2017). Overview | Statement on Monetary Policy – August 2017 |
RBA. [online] Available at: http://www.rba.gov.au/publications/smp/2017/aug/overview.html
[Accessed Sep. 2017].

MACROECONOMICS 13
Ryan, P. (2017). RBA optimistic about the future, if the Aussie dollar doesn't climb higher.
[online] ABC News. Available at: http://www.abc.net.au/news/2017-08-04/rba-slightly-
downgrades-growth-forecast-for-australian-economy/8774854 [Accessed Sep. 2017].
Salt, B. (2017). We are a small business nation. [online] Theaustralian.com.au. Available at:
http://www.theaustralian.com.au/business/opinion/bernard-salt-demographer/australia-a-nation-
of-small-businesses/news-story/a73834c0f227f0d0a83f0aefb3e8ff3b [Accessed Sep. 2017].
Swamy, P. and Tavlas, G. (2009). Financial Deregulation, the Demand for Money, and Monetary
Policy in Australia. Staff Papers - International Monetary Fund, 36(1), p.63.
Thorbecke, W. and Coppock, L. (2008). Monetary Policy, Stock Returns, and the Role of Credit
in the Transmission of Monetary Policy. SSRN Electronic Journal.
Tradingeconomics.com. (2017). Australia Inflation Rate | 1951-2017 | Data | Chart | Calendar |
Forecast. [online] Available at: https://tradingeconomics.com/australia/inflation-cpi [Accessed
Sep. 2017].
Tradingeconomics.com. (2017). Australian Dollar | 1993-2017 | Data | Chart | Calendar |
Forecast | News. [online] Available at: https://tradingeconomics.com/australia/currency
[Accessed Sep. 2017].
Tuan, B. (2012). Monetary Policy Surprises and Interest Rates: Evidence from Australia. SSRN
Electronic Journal.