Topic 1 – The Economy Situation: The Australian dollar has continued on a roller coaster ride over the past few months after a period of relative stability above parity against the greenback. While...

Topic 1 – The Economy

Situation:
The Australian dollar has continued on a roller coaster ride over the past
few months after a period of relative stability above parity against the
greenback. While the exporters are cheering the devalued AUD, tourists are
cautiously watching the money markets.

Task: Answer the below questions
1. What is monetary policy and what are the objectives of monetary policy for the
RBA?

The Reserve Bank of Australia is formulates and implements the monetary
policy in the country. Monetary policy involves decisions related to changing
the interest rates for the overnight loans in the Australian money market.
This is also called the cash rate and influences various other interest rates in
the economy. These fluctuations mainly affect the bo
owers and lenders, the
economic activity and eventually the inflation rate in the country.
The main objectives for Monetary Policy as set out in the Reserve Bank Act
1959 are:

- To stabilize the Australian cu
ency;
- To keep rates of employment high
- To maintain the overall economic prosperity and contribute to welfare of
the people of Australia.

These objectives have been practically translated into consumer price inflation
anging between 2–3 % per annum since 1993. The aim of the monetary
policy is to sustain this level so that strong and sustainable growth in the
economy is fostered. Controlling inflation leads to preservation of the value of
money. Very high inflation erodes the value of money and reduces the
purchasing capacity of people. In the long run, with this level of inflation, the
economic growth can be sustained.

2. Market numbers
a. What is the cu
ent Australian unemployment and inflation rate?
In 2013, as per the latest data available, Australia's unemployment rate
is 5.7% and inflation rate is 2.4%

. Have these numbers been stable or volatile over the past few years?
Yes, these numbers have been fluctuating within a range in the past
few years. The graph below shows the movement of these numbers
from 2009 onwards.









c. What is the cu
ent RBA cash rate?
The cu
ent RBA cash rate stands at 2.5%

d. Compare the cu
ent RBA cash rate with a major bank’s mortgage
interest rate.
Cu
ent RBA cash rate = 2.5%
Westpac Banking Corp. (WBC) mortgage interest rate = 5.98% (August
2013)

3. Many Australians who have retired are not happy about low interest rates.
Why is this so?

Retired Australians are not very happy with the low interest rates. This is
ecause this slashes out income they could have generated from their
etirement savings. It has been noted that the generation cu
ently in their
sixties, are more likely to continue working because with the financial stress,
etirement is out of reach for these individuals.

4. What is the monthly financial benefit for a household with a $300,000
mortgage over 25 years of a cut in their mortgage rate from 6% p.a. to 5.5%
p.a.? (use a loan calculator online from one of the major banks)

Interest rate 6% 5.5%
Monthly repayment $1,932.90 $1,842.26
Cost of loan 579,871.26 552,678.74
Cost of interest 279,871.26...