Australian interest rates on hold for now

On Tuesday the Reserve Bank of Australia (RBA) held their cash rate at 1.75%. This wasn't a shock as they cut the rate last month from 2% and it takes a crisis for rates to move very quickly. However forecasters are saying that 1.5% is the likely rate by the end of 2016.

The RBA is setting monetary policy to an expansionary stance because inflationary pressures are low. Growth is presently 3.1% which is below trend, but still the second best in the OECD. Wage pressures are low and the investment component of Aggregate Demand is weakening. This all points to a need to help boost the demand side of the economy with lower rates.

International concerns also feature in the RBA's thinking. If Australia is the second fastest OECD economy then we cannot expect a major growth in export demand any time soon. Also commodity prices are expected to remain at around current levels for the rest of the year.  Australia needs to look to the domestic market for growth.

The reaction of the markets to the interest rate decision was to raise the price of the Australian dollar. The exchange rate has fallen since 2013, but is now fluctuating between 70c and 75c to the US dollar. The boost to Australian export competitiveness has been welcomed, but the RBA's decision to keep Australia's relatively high rates on hold a while longer has meant a move to the higher end of the current trading band.

Major countries central bank interest rates compared to Australia

Australia      1.75%
USA             0.5%
UK               0.5%
Euro area    0.0%
Japan          0.0%

The RBA's decision is reported here 

Monetary policy is a major topic in both VCE and IB. The reasons for setting interest rates is a key area of knowledge as is the impact those decisions have on the wider economy.