Question

Looking back on 4 March 2008 when the interest rate was set at 7.25% by RBA (Reserve Bank Australia), however since then RBA gradually reduced the interest rate to its lowest 1% on 3 July 2019. Present an overview on the expectations or motivations behind such interest rate cut by RBA? (summary) [Note: In the early 1990s the interest rate was 17.5%, you don’t need to go back such distant past, your analysis should focus between 2008 to 2019] Talk about the impact on the economy after the interest rate changed. Summary of 400 words

Can you please help me with this overview? It is for my work

Answer 1

Reserve bank of Australia (RBA) influences the Australian economy using its multiple instruments. One such instrument used is the interest rate, sometimes also called as RBA “Official cash rate”.

What is the RBA Official Cash Rate (OCR)?

OCR is the rate of interest which the central bank i.e, RBA charges on overnight loans between commercial banks. Whenever a bank has a shortage of funds, they can typically borrow from the central bank. The OCR influences the price of borrowing money in Australia and provides the Reserve Bank with a means of influencing the level of economic activity and inflation. The rate is set by the central banks regularly, usually every month in Australia.

The OCR provides RBA with the ability to:

●   Stimulate or slow the economy

●   Manipulate the Australian dollar

●   Control inflation

Trend of OCR since 2008

The OCR for Australia has been falling for most of the time ever since 2008. From 7.25 % in march 2008 to mere 1% in August 2019.

There has been a rise during the period October,2009 - August 2011, but post August 2011 there has been a consistent fall in the rates.

The expectations / motivations behind interest rate cut by RBA

The most of reduction of OCR has been undertaken by RBA to make progress in reducing unemployment and achieve progress towards the inflation target.

Since long Australia has been facing increase in rates unemployment owing to High population growth and rising participation.

The impact on the economy after the interest rate changed

The measures used by RBA has not resulted in fall of unemployment rates and additional efforts might be needed for the RBA to meet its target of pushing unemployment down to around 4.5% - a low not reached since 2008 - from the current 5.2%.

A decreased cash rate has increased confidence of the banks to lend money. The risk of this is that if they lend to those who have little money to spare, following their mortgage repayments, not only is there a risk of the loan arrangement collapsing from any unforeseen changes to either the lender or investor but that the investor has little cash flow to spend within the economy.

The decrease in RBA interest rates since 2008 have also certainly contributed to the surge in house prices, especially in Melbourne and Sydney. Lender confidence has allowed home owners to either borrow and spend more on their homes, driving up their value, or borrow on their increasing equity to in turn become investors with multiple properties.