MONETARY POLICY. Incentives altered by the monetary policy
Incentives altered by the monetary policy
The Reserve Bank of Australia is held accountable for creating and putting monetary policy into practice. Australia has balanced exchange rates hence its money management policy includes the management of temporary interest rates to accomplish the objectives of domestic policy. Other countries, Canada and New Zealand, with developed economies apply this approach. In other nations, an optional center if interest for money management policy is the exchange rate. For instance, they may decide to have their base their exchange rate to a common global currency.
Monetary policy affects business investments in a number of ways. For instance, it affects saving and investment. Increased interest rates increase lending costs to finance expenditure. They also push up the inducement to save or reduce the rate of spending. This will in turn affect the profits of businesses. Real estate business are also affected when the there is high interest rates. This will make them delay the purchase of homes or decrease the amount of money they can spend in purchasing a house (Enright & Petty 2013, p. 65). When the interest rates reduce, businesses are able to borrow large sums of money which can be used in other investments. Consequently, the fluctuations in the number of housed being constructed or purchased will affect the price and demand of other goods like building materials. This will in turn affect those companies dealing in building materials and employment in the industry. When there is an increased cost of investment, less business savings projects are anticipated to produce sufficiently increased rates of proceeds to indicate their progress. However, such projects are carried out when the lending rate is reduced. It is always difficult to detect such changes since an organization involves a lot of vital factors controlling its investment.
The other way monetary policy affect business investment is through cash flow. The cash flow effect for organizations is considered to be less complex since most of them are major net borrowers. Fluctuations in interest rates can have a huge effect on the total cash flow of companies. For instance, in 1980s when the unpaid debts and interest rates were high, total business payments increased up to more than one-third of total profits. This limit on cash flow was definitely one of the reasons why there was a subsequent decrease in business investment in the subsequent years, even though other common recurring factors were also vital. Monetary policy also affects companies through money and credit. When there are increased monetary restrictions, the lending rates for banks are also controlled. The process of rationing loans implies that local banks will not receive enough funds hence they will be forced to regulate their lending rates. Therefore, it will not be easy for companies to obtain loans. If they will have to be given loans, then it will not involve huge sums of money thus this will have an effect in their development projects. However, the lending rate is not expected to change when the monetary policy introduces tight financial conditions (Wiedemer 2012, p. 22). Tight monetary regulations will affect the economy. Companies are not willing to borrow money in for development in the declining economies reducing the total credit improvement.
Fluctuations in interest rates can have an impact on the value of properties hence affecting the possessions and spending choices individuals. In turn, a number of businesses will also be affected since people will not be having enough money to purchase their products. There are a number o categories of properties through which this process might function. These include: residences, possession investments, shares, or other monetary investment. Hypothetically, increased interest rate is anticipated to create a reduction in the value of the properties since the opportunity cost for possessing the assets will be high. On the other hand, then the value of properties is low, the spending rate is anticipated to reduce though reduced wealth and lending capacity to the point that the properties concerned could have served as a security loan.
Monetary policy causes variations in the exchange rates which will in turn affect the prices of both local and foreign goods and services. For instance, a reduction in the interest rates increases the prices of imported goods. This will then affect the average prices of products bought because imported goods always have a direct relationship with the local spending. Business will be affected when the average price of goods is lower than normal. Their returns will decrease since they will be selling their products at a lower cost than that used in production. Monetary policy affects wage and price-setting. If monetary policy accomplishes its main goal of stabilizing prices, then inflation prospects will remain reduced. Therefore, wage and price-setting will also be low. It is important to note that fluctuations in demand can create anxiety in the labor market and intermediary goods market hence affecting wage and price-setting.
Reasons given by the Reserve Bank for its decision to raise interest rates in April 2010
Before the increase in the interest rates in 2010, reserve bank gave many reasons to justify their action. For instance, the government stated that the consensus to increase the lending rate was due to the fact that the international economy was steadily advancing and the GDP is also anticipated to rise in the subsequent years. The growth is still uncertain in some major nations since there was an ongoing legacy of the financial crisis leading to the continuing excess capacity. They gave an example of Asia which had undivided financial sector hence their growth has been tremendous (Desai 2011, p. 58). This effect creates pressure on the values of raw materials. The other reason provided was that the country was experiencing an increase in their trade conditions, adding to returns and advancing an upsurge in investment in the resources sector. In this situation, the output advancement in the country in the next coming years was expected to be more than that of the previous year, despite the fact that the effects of previous expansionary policy actions will be reducing.
The rate of unemployment appeared to have peaked at a reduced level that that which had been previously anticipated. The process of company sector de-gearing was becoming reasonable since the rate of reduction in business credit was also becoming less. This implied that additional lenders were increasingly becoming more prepared to lend some borrowers. The country’s housing dept was on the increase at a higher rate. Fresh provision of loans for housing have restrained in the last few months due to the increase in lending rates. However, at this time the market for creating houses is still distinguished by significant resilience, with the continuous increase in prices experienced at the beginning of 2010. The inflation has increased due to the increase in the temporary factors that had been holding it (Ferran 2012, p. 282). The government also noted that inflation was anticipated to be consistent with the set objective in 2010.
With the danger of serious economic reduction in the country having experienced some time back, the board has been reducing the level of monetary incentive that was installed when the outbreak was experienced to be much less. Loan providers have increased their rates higher than the cash rate. Lending rates to majority of the borrowers have been at a reduced rate than the normal. Therefore, the board decided that it was necessary to increase the interest rates because the growth was most probably to be around trend and price increases close to the objective in the coming year.
Australia’s monetary policies between 2006 and 2013
Arguably, the Australian monetary policies have been appropriate for the economic circumstances during this period because it has assisted in retaining the total internal balance. Especially, the country’s credible med-term inflation targeting structure has functioned appropriately throughout this period. Conversely, it is also important to note that monetary policy interfere with the factors determining the economy. The policy should not interfere with the occurrence of structural change. Monetary policies have played an important role in the total demand and supply is in wide balance hence organizations have been able to carry out staffing, investment, and production with realistic buoyancy concerning the safety of the overall economy (Mishkin 2007, p 424). Since the international financial crisis became more serious in 2008, the loosening of the monetary policy definitely played an important role to the Australian economy. Due to the relaxation, there was a change in the country’s temporary lending rates and exchange rate.
By first looking at the interest rate, Reserve Bank decreased authorized lending rates by 4.25%. This was after it was reduced from 7.25% to 3%, one of the lowest authorized lending rates. This implies that there was an additional household income per year. For instance, when housing loan of $200,000 is reduced by 3%, there would be an additional domestic income of $6000 per year, a huge multiple of $990 given out from the central government as a financial aid. Reduced lending rates also had an impact on the country’s economy. Most of the private companies which depended on credit during their constrained periods were relieved. This is considered to be applicable from employment viewpoint since unemployment mostly affects the private firms and not the public companies. Reduced lending rates also reduced the country’s exchange rate with more stimulatory effects.
The monetary policies have led to the reduction in the employment rate and increase in business investments. Moreover, the country has also experienced its retail sales increase above the rate that can be sustained. In 2008, monetary policy led to a reduction in the exchange rate and prices of products. This reduced the price of imported goods hence people were able to carry out purchases thereby improving their economy caused by the continuous flow of money.
List of references
Desai, P., 2011, From financial crisis to global recovery. New York, Columbia University Press.
Enright, M. J., & Petty, R., 2013, Australia’s Competitiveness From Lucky Country to Competitive Country. Hoboken, Wiley. http://msvu.eblib.com/patron/FullRecord.aspx?p=1187724.
Ferran, E., 2012, The regulatory aftermath of the global financial crisis. Cambridge, Cambridge University Press.
Mishkin, F. S., 2007, Monetary policy strategy. Cambridge, Mass. [u.a.], MIT Press.
Wiedemer, J. P., 2012, Real estate finance. Mason, Ohio, South-Western.