Reserve Bank of Australia Interest Rate Regime - Case Study Example

Australian Economy Report Name Course Instructor College Date of Submission Table of Contents 1.0Executive Summary 3 2.0 Introduction 4 3.0 Australian Economy; a two-edged economy? 4 3.1 Employment 4 3.1 Wages and Earnings 5 4.0 RBA Interest Rate Regime 5 5.0 Supportive Macroeconomic Policies 6 6.0 Conclusion 7 7.0 Policy Recommendations and Suggestions 7 8.0 References List 8 1.0 Executive Summary As of 2010, the Australian economy has withstood the after effects of the Global Financial Crisis (GFC) in a healthier economic standing than comparable western economies. However, debate has emerged describing Australia as a two-edged economy based on the performance of main industries: mining and retail, manufacturing and reality. Allusion to a two-speed economy has in general been taken to mean the fairly speedy rate of growth in Australia’s mining industry, compared with sluggish growth in other industries. The same has been reflected on wages and earnings as measured by the gender pay ratio. The RBA through interest rates manipulation has been able to take Australia through the GFC. Its speedy action was among the numerous factors that put away Australia from economic downturn. The fundamental might of the Australian economy, which has helped it to steer clear of downturn all through the GFC, the Dot-Com ruin plus the Great Depression, was established on key economic transformation executed for the period of the Hawke-Keating rule along with the early Howard duration. Strategists have to replicate on this information and be pompous of Australia’s success. Government spending in health care services, education, skills and schooling along with infrastructure is essential to keep the economy strong. 2.0 Introduction On the onset of 2010, it was clear that Australia had overcome the pressing after effects of the Global Financial Crisis (GFC) in a healthier economic standing than analogous western economies. In addition, by evading two successive quarters of downbeat growth, Australia managed to shun a technical economic slump. The country was undoubtedly in a better situation to handle the troubles. This has been accredited to various factors. The Governor of the Reserve Bank of Australia (RBA) linked it to growth in China along with ‘prudent fiscal and monetary frameworks’, the ‘economy’s flexibility’ plus the ‘relative strength of the financial sector’ (Stevens 2009, p.9; Satyajit 2012, p.1). On the other hand, debate has emerged describing Australia as a two-edged economy based on the performance of main industries: mining and retail, manufacturing and reality (Bewley 2011, p.18). This paper will focus on whether the Australian economy is double-edged; the RBA’s cash rate regulation; policies that possibly will assist the economy at large as well as recommendations and suggestions. 3.0 Australian Economy; a two-edged economy? Lately, allusion to a two-speed economy has in general been taken to mean the fairly speedy rate of growth in Australia’s mining industry, compared with sluggish growth in other industries. Mining plus associated operations and construction in engineering activities are doing truly well however manufacturers, retailers and tourism operators are facing a difficult economic situation. The March 2012 Performance of Manufacturing Index (PMI) analysis revealed that manufacturing is shrinking and the services sector is too in reduction mode. Mining expenditure went up by 5.6 percent with manufacturing investment declining by 9 percent at the same time as “other” investment fell by 4.8 percent (Jefferson & Preston 2010, p.329; Switzer 2012, p.57). 3.1 Employment In terms of employment, Australian Bureau of Statistics (ABS) indicates that the manufacturing sector engaged 960,430 people in October 2012, and the inclination has been going down more than the past three years from 1,072,900 near the beginning of 2008. For instance, the manufacturing sector got rid of 55,890 jobs in the between February 2011 and October 2012. On the other hand, mining jobs went up by 24,135 as the finance and insurance sector employment grew by 21,120 jobs over the same time (ABS, 2012). 3.1 Wages and Earnings In relation to wages and earnings, on the other hand, a very different view of the two edges in Australia’s economy is likely to be seen. In February 2007, the gender wage ratio was equal to 84.2 percent; by February 2010 the difference had expanded by 1.6 percentage points to 82.6 percent. This variation was statistically noteworthy. A slow track for women’s earnings in Australia was apparent. Mining has improved wage growth at 4.5 percent. Industries with lower than regular wage growth include manufacturing, retail trade, accommodation and food services, finance and insurance services, administrative and support services and other services. These statistics show that Australia is a two-edged economy (Jefferson & Preston 2010, p.329). 4.0 RBA Interest Rate Regime The RBA carries a twofold duty of upholding price stability plus full employment. Its principal tool for attaining targets mutually is raising or lowering the interest rate or else keeping it on hold. The RBA has been exercising this mandate in recent times therefore has been able to take Australia through the GFC. Interest rates were gradually being increased before the GFC. The very last increase to 7.25 percent in March 2008 was barely days prior to the fall down of Bear Sterns. But in November 2008 the RBA cut rates by 100 basis points to 6 percent - immediately following the collapse of Lehman Brothers on 15 September 2008. By April 2009 rates bad been reduced to a low level of 3 percent –see graph below- (Bewley 2011, p.19). This speedy action was among the numerous factors shielded Australia from the economic downturn. Clearly, Australia, having eluded the GFC, was about the first developed economy to begin rising interest rates subsequent to the GFC; early on in October 2009. Seven raises of 0.25 percent between September 2009 and Melbourne Cup Day 2010 increased interest rates up to 4.75 percent. According to trading economics (2013), the RBA in April quarter of 2013 upheld the cash rate at 3.0 percent. 5.0 Supportive Macroeconomic Policies The Australian economy has persisted economic turbulent. Glenn Stevens notes that policymakers ought to take stock and mirror on the present potency of the Australian economy and “as a minimum view the glass as half full”, in particular when comparing Australia’s performance with the confusion in Europe. The fundamental might of the Australian economy, which has helped it to steer clear of downturn all through the GFC, the Dot-Com ruin plus the Great Depression, was established on key economic transformation executed for the period of the Hawke-Keating rule along with the early Howard duration (Guay et al 2013, p.2). At present there are alarming economic confrontations that need both prudence plus policy answers from politicians and policymakers. Scores of these confrontations are known; among others, aging residents, declining schooling standards, expertise deficiency, and lack of adequate infrastructure for an advanced Australia. To counter these confrontations, Government spending in health care services, education, skills and education along with infrastructure is essential The RBA needs to uphold current low interest rates so as to facilitate improved money supply in the economy that will come in handy in enabling availability of financial support to other industries; manufacturing, as well as retail. In addition the government needs to review its tax regime or provide incentives on manufacturing and retail industries such that it encourages more investments in these sectors. 6.0 Conclusion To crown it all, the Australian economy brags of its steady performance through tough economic conditions. The economy is faced by the difficulty of balancing a thriving resources sector versus ailing manufacturing, retail and reality industries. The RBA is a key institution that has helped the economy sail through the GFC by way of raising, lowering or upholding interest rates when due. Other macroeconomic policies are obligatory especially government spending on key sectors. 7.0 Policy Recommendations and Suggestions According to Justin Brown, Australia’s High Commissioner, the heart of Australia’s Economic Stimulus Package (ESP) expenditure on “soft infrastructure”, for instance, education, innovation, science and technology, is a foremost factor for the brilliant economic prospect, mainly for the reason that it improved production and innovation in the services sector. The Australian dollar is a star performer on the international currency stage; Interest rate regulation is a must to sustain this achievement. Finally, if Australia’s confidence in foreign investment is to persist, particularly from China, it will have to get hold of its act as one. 8.0 References List ABS, 2012, Decline in independent contractors, viewed 24 April 2013, < http://www.abs.gov.au/ausstats/abs@.nsf/latestProducts/6359.0Media%20Release1November%202012 > Bewley, R 2011, A Case for a Rate Cut, Money Management Guay, C. L, Chew, L. C, and Viet H. N 2013, Review of the Australian economy 2012–13: A tale of two relativities, Australian Economic Review Volume 46 (1) 1–13 Jefferson, T and Preston, A 2010, Australia’s Other Two-Speed Economy: Gender, Employment and Earnings in the Slow Lane, Australian Bulletin of Labour, 36 (3) Bolger, P 2012, The Rise (and Rise) of the Ausi Dollar, Money Management Satyajit, D 2012, A Vulnerable State – the Economic Outlook for Australia, Keeping Good Companies Stevens, G 2009, ‘Prosperity isn’t easy’, The Australian, 5 November Switzer, P 2012, Growth Slow and Low, Chartered Accountants Journal Trading Economics, 2013, Australia Interest Rate, viewed 24 April 2013, < http://www.tradingeconomics.com/australia/interest-rate > Read More