Reserve Bank Of Australia Acts To Stimulate Growth

Arguably, Australia was the major economy least affected by the Global Financial Crisis. It managed to avoid a recession, but growth was cut significantly, of course and it was one of the first nations to tighten monetary policy by raising interest rates. Unemployment stands at 6.1% which is below the long-term average figure of 6.9% (between 1978 and 2015) and compares reasonably well with other major economies (USA 5.5%; UK 5.6%; Eurozone 11.3%).

Much of the economic strength of Australia is due to its mining industry and the export of raw materials. However, demand for these materials has weakened due to weakness in the global marketplace for finished products which, naturally, weakens demand for the precursor materials (and has the effect of putting downwards pressure on raw materials prices as well).

The recent relative strength of the Australian Dollar and a poorer than expected trade deficit figure were two of the reasons put forward as to why the Reserve Bank of Australia (RBA) has cut interest rates by a further 0.25% (the second such cut since February) to a record low of 2% – this rate is still vastly higher than US, EU or UK central bank interest rates, of course. It will make the cost of borrowing dip and, hopefully, help to stimulate businesses to expand. It should also move the AUD lower against the US Dollar, but as raw material prices are quoted in US Dollars, it will not make them cheaper, but will improve produce profits when US Dollar revenues are repatriated to Australia and converted to Aussie Dollars.

It is suggested that continuing declines in raw material prices due to weak demand, notably from China, probably mean that RBA will engage in further softening of its monetary policy later this year.

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Author: Travis Esquivel

Travis Esquivel is an engineer, passionate soccer player and full-time dad. He enjoys writing about innovation and technology from time to time.

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