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The Rise of the Cash Rate in Australian Reserve Bank

Introduction

The situation which occurred in Australian Reserve Bank needs some specific consideration and analysis. The rise of the cash rate seems to be ineffective, still, it is not really so. It is possible to agree that the decision the Reserve Bank Board made in the relation to monetary policy is rather tough for some families, but, it is the only reasonable decision in the situation which has recently occurred. To understand the problem in whole content and to agree to the decision made, we should analyze the situation which has recently occurred on the international arena, in domestic households, and on financial markets; this may allow us to understand the Monetary Policy decision of the Australian Bank.

Before getting down to analysis, the report should cover those people who influenced the decision making. The main participants of the Monetary Policy meeting of the Australian Reserve Bank Board were its chairman and governor Glenn Stevens, the deputy governor Ric Battellino, the secretary of the treasury Ken Henry Ac and some of the representatives (Minutes of the Monetary Policy Meeting of the Reserve Bank Board 2010).

International Economic Conditions

The international economics influenced greatly the decision of the Australia Reserve Bank to raise the cash rate by 0.25 points to 4.5%. The consideration of the international situation may help explain this decision. The global economy continues recovering from the world economic crisis occurred in 2008. The gross domestic income data is growing throughout the whole world. In spite of the fact that the general tendency is directed at recovering, different regions make it differently and the level of economic development (in the relation to the pre-crisis situation) in some parts of the world differs greatly.

Thus, Asia region economics is strong as opposed to Europe which economic indexes are weak. The North America economic condition improves. Chinese economy has taken a strict way to the rise even though the government had to conduct some specific actions for stabilizing prices on houses. The US economy is also growing. Considering the numbers of the economic grows, it should be mentioned that Chinese economy has been expended on 12% over the last year.

Other countries develop slower, still the tendency remains positive. Thus, the rate of Asia economy grows over the last year was 8% and in the USA it was 2.5%. Some countries still have the problems with inflation which remains on the high level. Nevertheless, domestic economic conditions impact greatly on the economy of the whole world in general and on the recovery from crisis in particular (Minutes of the Monetary Policy Meeting of the Reserve Bank Board 2010).

Domestic Economic Conditions

The situation in the households is as follows. The rate of the inflation is slightly higher from what has been expected, however, the commodity markets became stronger. Employment market is growing. At the same time, it is impossible to say that the situation is stable due to some fluctuations. There is a tendency for households to look forward to the future positively. The crisis is almost overcome in the housing market which is stable.

The manufacture in many industries has already increased their production due to the increased demand. A great pace in growth is seen in the steel industry due to the 100% raise of the contract prices on iron ore. It is possible to record the increase of prices in coking coal industry. The trade sector also recovers as well as engineering and business sectors. There is tendency for rising in a number of activities. The staff forecast is positive as well.

Considering the rate of the consumption of commodities in the households, it should be noted that it still remain on the low level in spite of the fact that the income growth is observed. Therefore, it is possible to follow the increase in the saving rate. Even though the inflation remains rather high, it strives for decreasing. The prices still remain slightly high in the comparison to those which have been predicted by the specialists. The rate of inflation is the reason for such situation (Minutes of the Monetary Policy Meeting of the Reserve Bank Board 2010).

Financial Markets

The situation on the world financial markets as well as that in the country influenced the Australian Reserve Bank Board decision to increase the cash rate greatly. The focus of the discussion was Greece and the financial problems its government faced. The situation in Greece impacted the international financial markets having created the mess there. The key facts which had been considered were as follows, the debt downgrade in Greece by three agencies, financial assistance for the governments on the euro arena, finalization of IMF, and the actions of the European Central Bank which aimed at making sure in eligibility of Greek repurchase actions.

The announcement of the problem had negative consequences for Greece. The international actions could not calm down the market, the situation worsened and Greek market became dysfunctional due to its debt. The Australian Reserve Bank Board worried in a number of reasons. First, some decisions had to be considered to help rehabilitate Greek financial market and to implement some protective methods to eliminate the repetition of the same situation in other countries of the world. Moreover, there was a real risk for it as the same situation occurred in Spain and Portugal. The sovereign debt had also been downgraded there.

Such great difficulties in different countri8es could not avoid the world situation and hit it in the relation to exchange rates and equity markets. The foreign exchange situation is as follows, the depreciation of euro, appreciation of the US dollar did not stir up the world currency market significantly. Considering the situation in Australia, it was concluded that “the Australian dollar was little changed against the US dollar, had reached new highs against the euro and had appreciated moderately on a trade-weighted basis” (Minutes of the Monetary Policy Meeting of the Reserve Bank Board 2010).

Considerations for Monetary Policy

When all the subsidiary conditions have been considered, the Australian Reserve Bank Board turned to the situation existed in the country. It was stated that there are a number of problems, both world and local which could bother the economy recovery in Australia. Even though the domestic economy in Australia is growing, the investments are strong, housing credit is growing, the conditions for business development are improved and the labor market is tightened, there are still some hazards Australian economy may suffer from unexpectedly. First, the world economy recovery is uneven.

Second, the inflation rates in the country are higher from the expected, even though some specific actions have been provided by the government. Third, after the consideration of this inflation rate it was concluded that it is not going to lower in the nearest future. Forth, even though the Greek sovereign debt downgrade did not influence Australia greatly, a number of downgraded sovereign debts in Europe alerted. Fifth, the euro area was uncertain.

Having considered all the information mentioned above, the Australian Reserve Bank Board has decided to act. The raise of cash rate by 0.25 points to 4.5% was the main decision which could protect the company of the country from destructive actions and save the recovery potential on the same level (Minutes of the Monetary Policy Meeting of the Reserve Bank Board 2010).

Critical analysis of the decision

In spite of the fact that the Monetary Policy decision made by the Reserve Bank Board is difficult to understand due to the complications and tough conditions created for families. The decision also influences small business in the country negatively. Still, the raise of cash rate is the only correct action the company could make in order to leave the economy recovery on the same high level. Australia is one of few countries which managed to recover from crisis so fast and continues doing it with the same speed. The growth of economic activities in different fields could be supported only by means of raising of cash rate. It should be stated that the actions provided by the Australian Reserve Bank Board proves that the remains of crisis are still visible and that the macro economy is imbalanced.

The actions the reserve bank would have undertaken to change the cash rate to this level

The Monetary Policy was effective from the 5th of May, 2010. Considering the problem as if it had been approved recently, the actions the reserve bank would have undertaken to change the case rate to the established level should be as follows. The relation between cash rate and other interest rates on the market are rather close, so the actions of the government should be rather careful. To put the cash rate on the appropriate level, the Reserve Bank Board should use domestic operations and funds supply which is available to banks at the current moment. The Board should also use some facilities to settle transactions of overnight funds.

The cash rate achieving is resulted in “the interaction of demand for and supply of overnight funds” (The Implementation of Monetary Policy 2010). The implementation of the established rate should be done the next day after the decision was made. It should be mentioned that to establish the cash rate is not so difficult. It is much more difficult to hold it on the necessary level.

Conclusion

In conclusion it should be stated, that even though that the decision made by the Australian Reserve Bank Board is considered to be negative and complicated for families and small business, it was the only correct decision. The imbalance in the global economy could be a real barrier for the recovery of the Australian economy. The conditions of the international and domestic economies, the cases with downgrading of sovereign debts in some countries, and other reasons could become a real hazard for the recovering strategy of the country, so the raise of the cash rate is considered to be the only correct decision.

Reference List

Minutes of the Monetary Policy Meeting of the Reserve Bank Board, 2010. Reserve Bank of Australia. Web.

The Implementation of Monetary Policy, 2010. Reserve Bank of Australia. Melbourne. Web.