RBA leaves cash rate steady, mixed on housing risks

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The cash rate was held steady at 1.5 per cent in last Tuesday’s meeting. This meeting marks the first meeting with new governor Philips Lowe. Notably, changes in the monetary policy statement provided by the RBA indicate concern over Australia’s house prices. Focus is now on the release of next month’s inflation figures on the 26 October.

How does this relate to the HSC syllabus?

  • Monetary policy is conducted by the Reserve Bank of Australia, where they adjust the cash rate (the rate in the short term money market) in order to influence the supply of money in the Australian economy.
    • By holding the cash rate steady, the RBA is indicating that they do not think that Australian economy is in need of stimulus, nor is it growing too quickly.
    • Interest rates around the world are remarkably low, so Australia’s cash rate is one of the world’s highest.
  • An important aspect of monetary policy is the credibility of the Reserve Bank. If the RBA is credible, then they are able to subdue inflationary expectations and control inflation to a greater extent. Hence, it is important that the RBA do not get things wrong and are independent of the political process.
    • Earlier in the year, the RBA continued to lower interest rates despite worries about inflated housing prices. This prompted some writers to claim that the RBA had lost credibility for not addressing one of the key economic concerns of the Australian economy.
    • This monetary policy statement included the line “some markets have strengthened recently”, suggesting that the RBA is increasing its focus on housing risks.
  • The release of updated inflation figures will determine whether the RBA will cut the cash rate in the November meeting. CBA economist Michael Blythe said if quarterly core inflation came in below a range of 0.4 per cent to 0.5 per cent, a rate cut in November became more likely.

Australians warned of risks of soaring household debt

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The International Monetary Fund (IMF) has released a report warning about the dangers of increasing household debt around the world. In particular, it singled out Australia, Canada and Singapore as three countries where the issue is especially bad. The IMF has recommended the phasing out of tax incentives which encourage borrowing, such as negative gearing.

How does this relate to the HSC syllabus?

  • The International Monetary Fund (IMF) is an international organisation which aims to promote global financial stability.
  • Higher global household debt can typically make recessions worse.
    • For a particular country, a recession usually decreases imports and as a result the trade balance increases, which acts to increase economic growth. However, when the rest of the global economy also has high global debt, then they are also performing poorly and do not purchase as many imports. Individual economies have nowhere to export their goods to boost their economic growth.
  • Negative gearing is a policy in Australia which allows a tax deduction when the cost of owning a rental property is higher than the income it generates. This incentivises people to purchase more property, which encourages borrowing and greater household debt.
    • Negative gearing has been highly controversial in Australia. Economists have claimed it to be a major cause of inflated housing prices as well as increased income inequality, since it mostly benefits high income earners.

Ford is officially finished as 600 workers are left unemployed

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Australia’s first major car maker, Ford, has officially produced its last few cars in Australia, triggering a series of redundancies.

How does this relate to the HSC syllabus?

  • The Australian car industry has struggled against bigger and better players from other countries.
    • Car industries in other countries operate with a lower cost base. One reason for this is Australia faces a higher minimum wage than the rest of the world. Another reason is that industries in other countries have gained more economies of scale.
    • The Australia car industry is an example of an infant industry which has had support from the government in the past to allow it to compete globally. This financial support is known as protection. However, in recent years, the Australian government has withdrawn protection from the car industry, leading to its decline.
  • This increase in short term unemployment represents an argument for protection. If an industry loses protection, they find it harder to compete on a global scale, possibly leading to the shutting down of firms. This leads to the retrenching of employees, which causes unemployment.
    • The counter-argument to this is that these people who become unemployed will eventually find employment in another industry which is probably more efficient than a protected industry. This will then increase overall economic growth.
    • However, as the article points out, there are short term costs to the individuals who experience unemployment. Some of them have worked at Ford for over 20 years, and may not have developed skills which suit other industries. This will leave them structurally unemployed as the skills that they possess are not in demand.

Gary Liang GARY LIANG

Gary Liang is the founder and director of Keystone Education. He attended Sydney Boys High and achieved an ATAR of 99.95 in 2012. He achieved 5 state ranks in Mathematics, Mathematics Ext 1, Mathematics Ext 2, Chemistry and Economics. He is now studying Economics and Science (Advanced Mathematics) at the UNSW Australia, where he is the recipient of four scholarships.

Theresa Dang THERESA DANG

Theresa Dang is an economics mentor at Keystone Education. She attended Sydney Girls High and achieved an ATAR of 99.70 in 2012. She is now studying Commerce and Law at the University of Sydney. She has experience in a global technology firm and a mutual fund.

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