Reserve Bank leaves interest rates on hold at 1.5pc

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The RBA leaves rates on hold for the first meeting of 2017, as widely expected.

How does this relate to the HSC syllabus?

  • As inflation is still not in the target range, and economic growth is weaker than expected, the RBA saw no reason to increase rates. The base case is that no rate changes are expect over the year.
  • However, a higher than expected exchange rate could provoke the RBA into lowering interest rates.
    • In the long run, an appreciated exchange rate would lower international competitiveness, harming Australia’s trade balance and economic growth. (HSC Topic 2)
    • Subsequently, the RBA would respond by lowering interest rates. Lower interest rates have two effects: firstly, it improves access to liquidity across Australia, improving economic growth, and secondly, it depreciates the currency, because foreign investors see that Australian assets earn a lower return, leading to them shifting their funds away and reducing their demand for Australian dollars. (HSC Topic 2)
  • One constraint on the possibility of further rate cuts is strong house price growth in Sydney and Melbourne.
    • Lower interest rates would drive house prices up even further, because it is easier for homebuyers to obtain finance. This would increase the probability of the ‘housing bubble’ bursting in Australia, which would cause a mild recession.
  • One other reason to keep rates on hold would be the uncertainty around global political leadership, namely Trump. In particular, if Trump’s promise to increase infrastructure spending is enacted, then this would put upward pressure on global interest rates.

Oil higher on OPEC output cuts, rising demand

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The price of oil rose as OPEC says that it has achieved 90% initial compliance on production cuts.

How does this relate to the HSC syllabus?

  • The Organization of the Petroleum Exporting Countries Oil (OPEC) is a group of 13 countries which account for an estimated 42 per cent of global oil production and 73 per cent of the world’s proven oil reserves.
    • They are a global example of a cartel. Members of a cartel collude to restrict the supply of oil, hence increasing the price of oil and generating more revenue for the member countries. Cartels are more common in oligopolies. (Prelim Topic 3)
    • Cartels are notoriously difficult to maintain, because there is an incentive for each member to break the agreement, producing a greater quantity and at a lower price in order to gain more market share. However, if all members do not abide, then they are all worse off. This is known as the prisoner’s dilemma in game theory, where an action makes you individual better off, but if everyone took that action, then everyone is worse off.
  • OPEC has agreed to attempt its first production cut since 2008, also including 11 non-member countries. Russia is the non-member country expected to cut the most production.
    • A big question is how compliant the members would be. Markets saw that 90% initial compliance was a good sign that the members would not break the agreement, and as a result the oil price rose by 1.7% to $US53.92 per barrel.
    • If these higher oil prices are maintained, they will have an effect on global economic growth. Higher oil prices means lower aggregate supply because inputs costs are higher, leading to lower economic growth. However, oil producing countries would experience higher economic growth as they increase their net exports. (HSC Topic 3)
    • Higher oil prices may also mean higher inflation, as the costs of producing goods and services increases, and this is passed on to consumers. (HSC Topic 3)

Le Pen is campaigning on how bad the EU is for France’s economy, just as things are improving

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Marine Le Pen has promised to ‘restore freedom’ to France if she wins the May election. Part of her plan includes a referendum on EU membership and returning to a national currency.

How does this relate to the HSC syllabus?

  • France is holding a presidential election in May this year. The key candidates are François Fillon (Les Républicains), Marine Le Pen (Front National) and Emmanuel Macron (En Marche).
  • Economists are particularly worried about the impact of the election of a candidate like Le Pen, whose policies bear similarity to Trump’s.
    • As the far right candidate, Le Pen has championed policies which are more anti-globalisation. For example, she has supported the separation of France from the EU and reduction of immigration. (HSC Topic 1)
  • Le Pen has also stated that she will impose ‘intelligent protectionism’, which will impose taxes on hiring foreign workers and imports. (HSC Topic 1)
    • If she is elected, there would be political and economic uncertainty as to the future of the EU. This could lead to a dampened level of investment and hence, lower economic growth. (HSC Topic 3)
    • As speculation of the downfall of the EU increases, this would depreciate the Euro currency. (HSC Topic 2)
  • With these events, as well as Brexit and the US elections, we are reminded of the interplay between geopolitics and economics. (HSC Topic 4)

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.

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