Word limit: 400 words (200 for each question)
Current Economic Scenario in Australia
Summary of the statement released by the RBA governor Philip Lowe on the 4th of February 2020:
Interest rates are very low around the world and a number of central banks eased monetary policy over the second half of 2019. There is an expectation of a little further monetary easing in some economies. Long-term government bond yields are around record lows in many countries, including Australia. Borrowing rates for both businesses and households are at historically low levels. The Australian dollar is around its lowest level over recent times.
The central scenario is for the Australian economy to grow by around 2¾ per cent this year and 3 per cent next year, which would be a step up from the growth rates over the past two years. In the short term, the bushfires and the coronavirus outbreak will temporarily weigh on domestic growth. The household sector has been adjusting to a protracted period of slow wages growth and, last year, to a decline in housing prices, with the result that consumption has been quite weak. The overall outlook is also being supported by the low level of interest rates, recent tax refunds, ongoing spending on infrastructure, a brighter outlook for the resources sector and, later this year, an expected recovery in residential construction.
The unemployment rate declined in December to 5.1 per cent. It is expected to remain around this level for some time, before gradually declining to a little below 5 per cent in 2021. Wages growth is subdued and is expected to remain at around its current rate for some time yet.
Inflation remains low and stable. Over 2019, CPI inflation was 1.8 per cent and underlying inflation was a little lower than this.
There are continuing signs of a pick-up in established housing markets. This is especially so in Sydney and Melbourne, but prices in some other markets have also increased. Mortgage loan commitments have also picked up, although demand for credit by investors remains subdued. Mortgage rates are at record lows and there is strong competition for borrowers of high credit quality. Credit conditions for small and medium-sized businesses remain tight.
The Board decided to leave the cash rate unchanged at 0.75 per cent on 4th Feb (following the same rate in the last four quarters), which has been reduced by further 25 basis points in the 3rd of March 2020. In fact, the cash rates and interest rates has been historically low since last 5 years in Australia.
Questions:
Introduction
What are the determinants of interest rate in general?
Please refer to the RBA website.