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RBA Individual Report

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Table of Contents

1. Background Information ..................................................................................................... 3

1.1 Introduction to the RBA .............................................................................................. 3

1.2 The Role of the RBA and Policy Decision ................................................................. 3

2. The Domestic Conditions Affecting the Cash Rate Decision ............................................ 4

3. External Conditions that Affect the Cash rate Decision ..................................................... 6

4. Effects of Internal and External factors on the Aggregate Demand Curve ........................ 7

5. Effects of Internal and External factors on the Aggregate Supply Curve .......................... 9

6. RBA Decision ................................................................................................................... 11

7. Conclusion ........................................................................................................................ 12

Works Cited ............................................................................................................................. 13


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1. Background Information

1.1 Introduction to the RBA

Established through the Reserve Bank Act 1959, the Reserve Bank of Australia (RBA) is

the banker for the government, offering banking services to the government as well as

offering banking services to other banks and printing and distributing currency (Hawkins 98).

The RBA is also in charge of monetary policy in the country, which is often effected through

the cash rate. Constant review and reporting on the cash rate helps in predicting the direction

that the economy will move hence the country has been observing the changes in the cash

rate keenly since the 1980s. As a result of this, the changes in the cash rate shown in figure 1

below has been used as a yardstick for economic development.

1.2 The Role of the RBA and Policy Decision

The role of the RBA is specified in the Reserve Bank Act 1959 which is simplified as

using the bank’s monetary and banking policy for the good and betterment of the general

population. Arising from this role, the bank has three main responsibilities, which include

ensuring the currency of the country is maintained at a stable rate, there is a maintenance of

full employment, and ensuring there is economic stability and prosperity within the country

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Cash Rate Since 1990


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(Williams and Prather, 222). These roles and responsibilities ensure that the RBA is one of

the major drivers and controllers of the monetary policy within the country as well as a

custodian of monetary and banking decisions for major decision makers in the economy. As a

result, the RBA board meeting to recommend a shift in the interest rate is critical for the

development of the economy and stability of major economic factors and conditions. The

policy decision from the RBA board meeting is maintaining the cash rate at the current

0.75%. This is in line with the changing economic conditions in the country that called for a

lowered cash rate months ago that have now stabilized.

2. The Domestic Conditions Affecting the Cash Rate Decision

There are several factors that necessitated a cash rate cut in the Australian market.

First, the inflation rate in the country had been lukewarm, which means it has been increasing

and dropping at unpredictable intervals. According to Cohen and Karatzimas (97), price

stability is desirable in economic stability, which means the business should always aim to

maintain the prices as low as possible for good economic growth. With unstable inflation, the

RBA could effectively affect monetary policy because it creates uncertainty in price, an

important determinant in business decisions including purchases and investment decisions.

The RBA aims at maintaining a cash rate that helps in maintaining a low rate of inflation

hence a relative price stability, which led to the decision to cut the rate as it would enhance

better price stability.

Within the Australian economy, unemployment had also been rising, which made it

necessary to affect the labour market through the cash rate. Lowies et al. (309) notes that one

of the main duties of the RBA to the people is ensuring that the rate of unemployment in the

economy is kept low or doing the best to ensure there is full employment in the market.

While achieving full employment is a challenging endeavour nearly impossible to get,

maintaining the rates of unemployment low is practical and mostly used by the businesses.


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The cash rate affects the ability of the businesses to create employment by affecting the

ability of the businesses to access finance hence invest and create jobs. The RBA therefore

cuts the cash rate to ensure that the businesses can be able to access more finances and create

more employment. The higher the rate of unemployment in the country, the more the need to

have more rate cuts.

The rate of savings had been on the increase in the past years that has convinced the

RBA that there was need for a rate cut. According to Lowies et al. (316), increasing savings

are a sign of one of two things; either the customers are getting higher returns from saving

than from investing or there is too much money in supply. However, the Australian economy

had managed the money supply well in the economy hence the increasing savings meant

there was better return from saving than investing. Lowering the cash rate was an effective

way to encourage investment that will boost higher economic development hence developing

better employment numbers and better returns in the economy.

Lastly, the Australian economy had shown that there is low liquidity, which was

effective in ensuring that there is better expenditure. One of the elements of economic

development is expenditure, which is affected by liquidity (Lowies et al. 320). With the cash

rate high hence the interest rates high, the customers had lower money in liquidity hence their

expenditure was low. The RBA is responsible for ensuring that there is sustainable economic

growth, which is affected by the GDP of the country. The RBA should therefore develop a

strategy that will ensure the GDP of the country grows hence the economic development of

the country is enhanced. Encouraging expenditure is good for businesses because there is

better chances of good business performance with higher expenditure hence the good

performance encourages business growth, increase in employment, and increase in economic

growth. Increase in liquidity is also an effective measure to ensure that there is increasing


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demand for mortgages and mortgage expenditure, which is effective in ensuring there is

better performance for mortgage and housing market in the country.

3. External Conditions that Affect the Cash rate Decision

The Australian financial market works in the context of the global financial and

economic market hence the movement and factors in the global markets affects the strategy

and policy adopted within the Australian market. The major external factor that affects the

cash rate in Australia is the global economy. There had been high growth in employment

across the world and too high economic growth in major markets such as the United States

and China as well as in Europe that led to fears of a recession in the near future (Cohen and

Karatzimas 101). The threat of recession means that the Australian market must have a

capacity to manage and absorbs the shocks that would come with a possible recession, which

means that economic development should be maintained at a high rate. The rate cut was

effective because there is need to increase economic development hence make the country

resistant in order to create better economic resiliency.

The global currencies had also been strengthening because of the strengths of the

economies in the host economies as well as the strengths of the currencies globally relative to

the Australian currency hence the need to use monetary policy to influence the money market

(Cohen and Karatzimas 99). For example, the strength of the US dollar against the Canadian

dollar has been stable to increasing over the past years. This shows that the economic

development in the United States is better than in Australia, which is effective in ensuring

that there is an understanding of the cash rate in the Australian market. The rate cut was

therefore informed by the need to attract more international investment into the Australian

market through better exchange rates that help in creating a better environment for working in

the Australian market.


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The cash rate change is also responsive to interest rate changes in other major

economies across the world. The movements in the global economic trends are shaped by the

trends in some of the major economies across the world, which include the United States,

china, the European common market and individual markets, and the Japanese market. The

movements in the interest rates in these economies therefore influence the decision that RBA

makes on the interest rates. Over the past months, there had been signals from these major

markets that there would be cuts in their rates because many of the economies had been

struggling with similar issues to Australia as well as many other factors that do not affect

Australia. The decision to cut the cash rate in Australia was therefore a reaction to the global

markets as well as a response to the economic factors in these major markets.

4. Effects of Internal and External factors on the Aggregate Demand Curve

According to Tahir et al. (439), the rate of unemployment in an economy is inversely

proportional to the aggregate demand in the economy. When there is an increasing rate of

unemployment, there is likelihood that the aggregate demand curve will shift negatively due

to a negative movement along the Phelps curve. This means that the Australian economy was

operating at a lower aggregate demand than can meet the economic needs of the country. The

lowering of the cash rate by the RBA was therefore a strategy that helps in enhancing

economic growth through creating better aggregate demand that increases the economic

development hence creating better living conditions.

According to Tahir et al. (439), there are only two ways through which price can

affect the aggregate demand, which include lowering the price as well as maintaining the

price stable. Price stability means that efforts to ensure higher demand will increase

expenditure hence increase aggregate demand and increase the development of the economy

through a positive shift in the demand curve. Price stability is therefore necessary in ensuring

that there is better development throughout the economy that will create better economic


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development due to increase in demand that creates better economic development and a

better and more stable economy in Australia.

The aggregate demand curve feeds off demand and supply, which means that money

should be circulating in the economy and creating a high liquidity in order to have a positive

shift in the average demand curve. Turner and Coote (132) notes that in an economy with

high savings, it means that the circulation of money is low as there is low expenditure with

expenditure inversely proportional to savings. As a result, the increasing savings in the

economy meant that there was low circulation of money due to low expenditure hence low

income for businesses and low economic development. The policy to lower the cash rate

lowered savings, increased expenditure and investment and increased demand hence having a

positive effect on the aggregate demand curve. More so, savings affect the liquidity levels in

the economy. When money is saved in the banks, it means that it can only circulate through

bank operations and there is little circulation through such an avenue due to regulatory

limitations. Open Market Operations (OMO) do not work effectively to increase liquidity

without creating inflation if the bank rates are high enough for the customers to be willing to

save. As a result, the Australian economy had reached a level where the banks were offering

more attractive rates hence the economy was developing slowly with the population

preferring savings to investments.

Externally, the growth and development in the global economy also affects the local

economy through inflows of finances in the commodity and money markets hence a

development in the demand within the economies. According to Wang et al. (2), when there

is development in the international global markets such as China and the United States, funds

stream into countries that have trade relations through investments and expenditure on

services like tourism. Australia has been a major beneficiary of the international development

economically especially in countries like the United States and China. The increase in


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development in these countries have increased the demand hence the expenditure within the

country hence creating a positive effect on the aggregate demand curve. The change in cash

rate to create a better economic development locally would therefore attract even more

investment from these economies, which is necessary in creating sustainable economic

development.

Lastly, exchange rates strengthening is effective in positive development in the

demand curve because of creating more demand locally hence increasing the aggregate

demand within the economy. The exchange rates ensure that there is sufficient inflow of

foreign currency into the Australian market, which is effective in ensuring that the

international companies can find the market within the company conducive for the

development of local investment (Wang et al. 7). The exchange rate market therefore creates

currency flow and investment flow into the country hence the change in the cash rate to

increase foreign exchange would create better local investment.

5. Effects of Internal and External factors on the Aggregate Supply Curve

Unemployment is one of the major factors that affect aggregate supply through

creating of demand and working through the forces of demand and supply. Unemployment

means that there is low demand hence the prices drop. A decrease in demand and a drop in

prices discourage supply hence there is a negative shift in the supply curve. A negative shift

in the supply curve means that the business environment is struggling to sell its products and

the economic development is not positive (Williams and Prather 222). A rate cut was

therefore effective in creating more demand, more expenditure and more supply. Decreasing

unemployment therefore creates better supply hence a positive shift in the Aggregate Supply

through the forces of demand and supply in the market.

Price stability is also a factor that tremendously affects aggregate supply. According

to Williams and Prather (229), price is directly proportional to supply. This means that an


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increase in price is likely to cause an increase in price hence suppliers would prefer an

increase in price in the short run especially when it has a high corresponding demand.

However, in the long run, the suppliers prefer a stability in the price because of the need for

certainty and consistency in demand as continued high prices discourage demand hence

discouraging sales. Price stability and low inflation rates synonymous with interest rate cuts

are therefore desirable for suppliers in the long run.

Like Aggregate Demand, Aggregate supply is highly affected by the savings culture

in the country. According to Wang et al. (12), suppliers prefer an economy that has a high

turnover period. This means that goods get to the market and the customers almost

immediately they land in the market. There are no unnecessary delays that cause backlog in

the goods held by the suppliers and retailers. Changing the population from savers to

investors and consumers is therefore in the best interest of aggregate supply. Decreased

savings mean that there is more money in circulation hence more demand. An increased

demand stimulates an increase in supply through the market operations.

Lastly, international markets have a major effect on the aggregate supply within the

country. According to Wang et al. (17), foreign market operations influence the supply of

money, employment, liquidity, and the supply of goods, which are all critical elements in the

aggregate supply in the country. Foreign exchange, for example, facilitate inflow of the

international currency that increases demand from the foreigners thus increasing aggregate

demand that affects aggregate supply through the theory of demand and supply. Rate cuts

would therefore increase foreign exchange and operations in the exchange markets that would

increase the presence of foreign currency in the local market hence increasing the demand for

local goods from the foreigners and tourists. On the other hand, good economic performance

in the global markets increases the demand for exports, which is effective for the local

companies because that is an element of supply that is not tied to the local performance in


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Australia. Stimulation of international demand that creates good supply creates good

circulation locally that has a positive effect on the aggregate supply curve.

6. RBA Decision

The best decision by the RBA is to maintain the current cash rate at 0.75%. According

to Cohen and Karatzimas (100), a cut in the cash rate is only encouraged in order to stimulate

economic development through injection of development opportunities. This is a strategy to

induce economic development through manipulating various factors such as investment,

demand, savings, and employment. Cutting the cash rate is therefore an expansionary strategy

although it should be undertaken carefully to ensure that it does not cause development at a

rate too high that it ends up causing inflation and setting up the economy for a recession. At

the moment, the economy is stable and performing well hence a cash rate cut is unnecessary.

The choice to maintaining the cash rate is inspired by a number of decisions. First, the

unemployment numbers have been decreasing in the economy since the last cash rate cut.

One of the roles of a rate cut was to encourage employment through creation of opportunities

for businesses to expand in the market. The rate cut availed money to the businesses in the

economy that helped to drive a strategy of employment creation. More so, this choice is

appropriate because of a decrease in savings in the country that signifies an increase in

expenditure hence a growth in economic development. Savings mean that expenditure is slow

in the country, which negatively affects the aggregate demand and supply hence affecting the

economic development in the country. Reduction in savings therefore necessitate holding the

current cash rate.

Internationally, maintaining the current rate would help the market in attracting better

foreign exchange. According to Cohen and Karatzimas (96), foreign exchange is enabled by a

growing local market that strengthens the local currency and creates stability in the market.

The Australian dollar would grow stronger as it has been since taking the last rate cut that


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would make the business environment more favourable hence strengthening international

exchange. Lastly, there have been positive developments in the global markets that influence

investment and demand in Australia. All other economies have signified intentions to

maintain their interest rates hence taking the same route is appropriate for Australia.

7. Conclusion

The role of the RBA in Australia is to ensure that monetary policy is implemented and

the financial environment is sufficiently regulated. This is undertaken partly through

monitoring and regulating the cash rate. For the RBA, this is a strategy to ensure the market

is more liquid and there is more flow of money, better employment, more development, and

led economic strain. For the case in this report, a rate hold is recommended as the best course

of action for RBA because of the prevailing market and money conditions that favour a rate

maintenance. For example, unemployment has been on the decrease in the country while

savings have reduced among the people. There has also been an increase in economic growth

above the stable and low inflation and increased price stability. Internationally, the global

markets have signalled rate holds while there is need for Australia to strengthen her currency.


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Works Cited

Cohen, Sandra, and Sotirios Karatzimas. "Accounting Information Quality and Decision-

Usefulness of Governmental Financial Reporting: Moving from Cash to Modified

Cash." Meditari Accountancy Research, vol. 25, no. 1, 2017, pp. 95-113.

Hawkins, John. "Australia's Money Mandarins: The Reserve Bank and the Politics of

Money." Economic Record, vol. 81, no. 252, 2005, pp. 98.

Lowies, Braam, Christa Viljoen, and Stanley McGreal. "Investor Perspectives on Property

Crowdfunding: Evidence from Australia." Journal of Financial Management of Property

and Construction, vol. 22, no. 3, 2017, pp. 303-321.

doi:http://dx.doi.org/10.1108/JFMPC-12-2016-0055.

Tahir, Muhammad, Haslindar Ibrahim, and Abdul H. Zulkafli. "Exchange Rate Fluctuations

and Dividend Repatriation Decision of Multinational Corporations." Global Business

and Management Research, vol. 10, no. 3, 2018, pp. 439.

Turner, Michael J., and Leonard V. Coote. "Incentives and Monitoring: Impact on the

Financial and Non-Financial Orientation of Capital Budgeting." Meditari Accountancy

Research, vol. 26, no. 1, 2018, pp. 122-144. doi:http://dx.doi.org/10.1108/MEDAR-02-

2017-0117.

Wang, Luo, et al. "Return Predictability in Australian Managed Funds." International

Journal of Business and Economics, vol. 16, no. 1, 2017, pp. 1-19.

Williams, Barry, and Laurie Prather. "Bank Risk and Return: The Impact of Bank Non-

Interest Income." International Journal of Managerial Finance, vol. 6, no. 3, 2010, pp.

220-244. doi:http://dx.doi.org/10.1108/17439131011056233.


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