Question

Monetary Policy - Consider the Reserve Bank Board Meeting scheduled for Tuesday June 2nd. Using your knowledge and data available from the Australian Bureau of Statistics and applying your understanding of the current conditions in the economy, what do you think the Reserve Bank will do to the cash rate?

increase it by 50 basis points

increase it by 25 basis points

keep it on hold

decrease it by 25 basis points

decrease it by 50 basis points

Explain why you have reached this decision.

[maximum 250 words]

Answer 1

The cash rate is the official rate at which central bank of Australia lends money to commercial banks. And the cash rate is at the record low level of 0.25% amid the pandemic created by the covid-19.

Based on the data available with Australian bureau of statistics and knowledge of macroeconomics, I think that the central bank in its June meeting will the cash rate on hold at 0.25%. The reason behind this is the effects of covid-19 which is manifesting itself as high unemployment rate and corresponding to a very low output growth rate projections for coming years.

Learning from other countries experience there is no real benefit of having a negative interest rate, so we can eliminate the options of decreasing the cash rate.

Let's come why we shouldn't increase the cash rate in upcoming meeting of central bank. At the cash rate of 0.25% there is only way it's going to move, that is upwards. But as long as economy is below its long run equilibrium level of output and employment there is no point of increasing the cash rate, since the whole purpose of decreasing the cash rate was to get economy out of the recession caused by the pandemic.

Conclusion : In upcoming meeting of central bank of Australia I think the cash rate is going to be at 0.25, i.e the central bank of Australia will the keep the cash rate at hold.