It will be necessary and important for the RBA to keep

interest rates at current levels for the purposes of recovering

the Australian economy.

The Reserve Bank of Australia must ensure that the monetary policy is under control and
the economy is devoid of undue pressure. The most important function is to attain the
system of stability of price, full employment attainment of the economic prosperity. The
RBA board meeting 11 times a year and before the initiation of the meeting the board
members are given the economic evaluation. The RBA monetary policy completely rests
on such assessment. From this media article, it is noted that the Board should leave the
cash rate unchanged at 0.10% currently instead of increasing it. This was because the
economy of Australia is experiencing a period of recovering due to the Covid-19. Since
the business condition is a positive and non-mining investment of business is expected to
enhance. Therefore, considering the overall factors, the decision to leave the cash rate
unchanged was justified.

"It is ascertained that monetary policy acts as a potent tool when it comes to the concept
of transformation of the economy" (RBA, 2021). Especially, interest rates have always
been one of the important factors in the economic development of a country. Is the RBA's
determination to keep interest rates at the current level the right decision?

While the RBA's leadership has declared that it will not raise rates till 2024 or even later,
emulating other major economic powers that are prepared to unleash their economies at
full speed to spur inflation in the wake of the year after year of insurmountable inflation
(AboElsoud, AlQudah & Elish, 2020). According to Kim and Nguyen (2008), in order to
avoid stifling the economic recovery, the RBA is wary of increasing interest rates too
quickly; the financial department, which has stated that re-entering full employment is a
major priority, will unveil its exclusive news in the coming weeks. To make decisions,
the government looks to an economy worth 1.55 trillion dollars and predicts 4.75%
growth.

It can be seen that Real GDP has fluctuated quite significantly due to the impact of the
covid-19 pandemic. Particularly, Australia's percentage of GDP has fallen sharply since
the outbreak of the pandemic in early 2020, as shown in table 1, with a peak of negative
6.97% in the second quarter. However, the share of real GDP has recovered significantly
increased to 3.4% in the third quarter and 3.21% in the fourth quarter, respectively.
Likewise, the percentage change in Personal and Government Consumption Expenditures
were both significantly reduced in the first and second quarters of 2020 due to the
pandemic, which contributed to the decline of the Australian economy in particular and
the economic world in general. However, both of these indexes increased substantially
again after the pandemic was controlled. Regarding Real Net Exports, which is one of the
indicators that clearly show the economic situation of each country. In Australia, Net
Exports plummeted from 13.23% to a negative 1.61% when Covid-19 appeared and
exploded rapidly in countries at the end of 2019. Despite this, the first 2 quarters of 2020
saw Australia's net exports increased strongly to 12.88% and 20.4% before being hit hard
by the pandemic and plummeted to -38.09% in Q3. By Q1 2021, Australia's net exports
have not been able to recover for production reasons as well as other countries affected
by the pandemic. In addition, because of the influence of Covid-19, spending on social
utilities, infrastructure, equipment, and machinery is almost impossible, leading to a
sharp decrease in the Fixed Investment Index from the end of 2019 to the mid-2020
before showing signs of increasing again in the third quarter of 2020.
As regards the Unemployment rate, it is not remarkable as the unemployment rate in
Australia fluctuated from 5.1% to 5.3% in 2019. However, the unemployment rate
experienced a considerable increase with a peak was 7.5% in Q3 2020 which shows that
the pandemic is causing a lot of people to lose their jobs as well as many businesses to
close. The good news is that the current unemployment rate has decreased significantly
due to the control of the epidemic as well as the strong deployment of vaccination.

On the other hand, Australia's annual inflation rate rose to 1.1% in Q1 2021 from 0.9% in
Q4 and surpassed the market consensus of 1.4%. This was the highest reading since Q1
2020 as a result of tobacco excise increases, changes to Medicare and Pharmaceutical
Benefits, the introduction, continuation, and conclusion of a number of government
schemes, and home building grants. Prices increased for food (0.7% vs 2.3% in Q4),
alcohol & tobacco (7.9% vs 9.3%), furnishings (2.7% vs 3.6%), health (3% vs 2.6%),
transport (0.4% vs -4.6%), recreation (1.5% vs flat reading), and insurance & financial
services (0.6% vs 1.2%). In contrast, cost fell further for housing (-1.1% vs -0.9%),
education (-0.1% vs 2.1%), and communication (-1.9% vs -2.7%). On a quarterly basis,
consumer prices went up 0.6%, the least in three quarters, below forecasts of 0.9%. The
Trimmed Mean CPI rose 1.1% YoY in Q1, the lowest in history, after rising 1.2% in Q4.
It rose 0.3% quarter-on-quarter after gaining 0.4% in Q4.

Given the economic situation described by the above economic indicators, I suggest that
the RBA should keep the current interest rate at 0.10% which contributes to accelerating
the economic recovery in this country.

This monetary policy change will directly affect other interest rates in the economy and
economic activity and inflation as well. In case the RBA increases the cash rate,
households or businesses will not be able to borrow money with a high-interest rate,
along with which banks will also have difficulty in their business. Consequently,
businesses lead to bankruptcy or just try to survive with low productivity when they
cannot afford to increase production because of a lack of budget for things like wages,
equipment, etc. As a result, the unemployment rate is increasing day by day. In addition,
when Consumer Confidence is showing signs of recovery, increasing interest rates will
make consumers think twice when spending on any commodity. In contrast, there are
greater incentives for households to spend now rather than wait for a lower interest rate to
help them save. Spending on durable goods such as cars and household appliances, as
well as housing can be stimulated. Therefore, keeping interest rates should be associated
with rising household consumption and house investments, particularly, the
unemployment rate will be decreased significantly. Furthermore, RBA also makes sure
that the inflation rate will be low and stable from 2% to 3% for the purpose of developing
a sustainable economy after the pandemic.

Through economic indicators, we can see that Australia's economy is gradually

recovering and having positive effects in recent quarters. The RBA's continued to keep
interest rates at present will be the core factor driving the Australian economy to recover
and grow faster in the future.
 References
Australia Real Gross Domestic Product | Moody’s Analytics. (n.d.). Www.economy.com.
https://www.economy.com/australia/real-gross-domestic-product

AboElsoud, M. E., AlQudah, A., & Elish, E. (2020). Does a change in immigration affect
the unemployment rate in host countries? Evidence from Australia. Journal of
Applied Economics, 23(1), 21-43.

Australia | Economic Indicators | Moody’s Analytics. (n.d.). Www.economy.com.

Retrieved June 20, 2021, from https://www.economy.com/australia/indicators

Economy | Australian Bureau of Statistics. (2021). www.abs.gov.au.

https://www.abs.gov.au/statistics/economy

Kim, S.-J., & Nguyen, D. Q. T. (2008). The reaction of the Australian financial markets
to the interest rate news from the Reserve Bank of Australia and the U.S.
Fed. Research in International Business and Finance, 22(3), 378–395.
https://doi.org/10.1016/j.ribaf.2008.02.001

Reserve Bank Of Australia. (2021). Measures of Consumer Price Inflation. Reserve Bank
of Australia. https://www.rba.gov.au/inflation/measures-cpi.html
 Appendix

Table 1. Main Economic Indicators of Australia

Australia 2019 2020

Economic 2021
Indicators (%) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1
Real GDP Growth 0,4 0,65 0,69 0,38 -0,3 -6,97 3,46 3,21 1,79
Private
Consumption
Expenditures 0,36 0,37 0,01 0,34 -1,42 -12,29 7,78 4,48 1,21
Real Fixed
Investment -0,61 -0,87 0,91 -0,7 -0,44 -4,49 0,45 3,41 4,75
Real Net Exports 4,92 21,42 13,23 -1,61 12,88 20,4 -38,09 -4,51 -22,5
Government
Consumption
Expenditures 0,89 2,69 0,86 1,31 1,71 3,01 1,55 0,87 -0,52
Unemployment
Rate 5,1 5,1 5,2 5,3 5,3 6,3 7,5 7 6,3
Inflation Rate 1,8 1,6 1,7 1,8 2,2 -0,3 1,6 0,9 1,1
CPI 0,5 0,6 0,5 0,7 -0,3 -1,9 1,6 0,9 0,6
Consumer
Confidence
(points) 100,71 100,9 100,5 100,68 99,13 97,94 97,3 98,72 107,4
Table 2: Consumer Price Index, selected groups.
Figure 1: Australia – Real Gross Domestic Product (Source: Australia Bureau Of
Statistics)

Figure 2: The annual inflation rate in Australia (Source: Australia Bureau Of

Statistics)
Figure 3: A higher interest rate reduces investment expenditures and causes the
quantity demanded of goods and services to fall