IMF urges RBA to reveal interest rate forecasts

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The IMF’s top economic advisor to Australia has recommended that the RBA publish its projected path for interest rates and inflation and that the Federal government set a long-term debt target.

How does this relate to the HSC syllabus?

  • The Reserve Bank of Australia is Australia’s central bank, in charge of setting the cash rate. (Prelim Topic 4, HSC Topic 4)
    • The cash rate is the interest rate at which financial institution pay to borrow or charge to lend in the short-term money market on an overnight basis. The Reserve Bank of Australia uses a process called domestic market operations or open market operations to influence the cash rate.
    • When the cash rate increases, the cost of borrowing from the RBA has effectively increased, so the banks would want to maintain their profit margins by increasing the rates they charge.
  • One of the RBA’s key objectives is to maintain price stability, which has been defined as CPI inflation of 2-3%. (HSC Topic 4)
    • The inflation target is beneficial because it provides certainty for future prices, anchors inflationary expectations and establishes credibility when the target is achieved.
  • Inflationary expectations have a significant effect on inflation itself. (HSC Topic 3)
    • Inflationary expectations refers to people’s perception of what future inflation will be based on past and current inflation.
    • One argument is that when inflation increases, people think that their cost of living will go up, so they demand higher wages, which leads to more cost push inflation. So expectations of higher inflation creates higher inflation.
    • In the current period of low inflation, it may be beneficial for the RBA to publish their projections of when inflation will reach the 2-3% target. This will anchor the market’s expectations of inflation, and increase the effectiveness of monetary policy.

January 2017 labour market statistics

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Full time employment has fallen to a 16-month low, while the (seasonally adjusted) unemployment rate has decreased from 5.8% to 5.7%.

How does this relate to the HSC syllabus?

  • The unemployment rate refers to the percentage of the labour force that is unemployed (those that do not have a job but are actively seeking one). In this release, the unemployment rate has decreased, which, on the surface, appears to reflect a better performing economy. (HSC Topic 3, Prelim Topic 4)
  • However, the unemployment rate is just a percentage and greater insight can be gained by looking at other statistics. (HSC Topic 3, Prelim Topic 4)
    • While overall employment increased by 13,500, full-time employment actually decreased by 44,800 persons while part-time employment increased by 58,300. This may be an indication of underemployment, where there is a greater percentage of the labour force who wish to be working more hours. Underemployment masks the true state of the labour market.

The IMF bails Mongolia out—again

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This month, the IMF agreed to lend Mongolia $440m over 3 years to help it avoid default and rebuild its reserves.

How does this relate to the HSC syllabus?

  • The International Monetary Fund (IMF) is an international organisation of “188 countries working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world” (IMF). (HSC Topic 1)
  • Balance of payments difficulties are “situations where sufficient financing on affordable terms cannot be obtained to meet international payment obligations” (IMF). (HSC Topic 2)
    • Usually, balance of payments difficulties occur when current account deficits grow too negative and the debt levels in the country appear to be unsustainable.
    • One of the ways the IMF maintains international financial stability is by providing financial assistance for balance of payments difficulties. In particular, they might provide cheaper loans to provide liquidity for countries experiencing such problems.
  • Mongolia’s problems stem from their narrow export base. (HSC Topic 2)
    • They are a primarily commodity driven economy, and since the mining slump from 2014, commodity prices have fallen, leading to lower export revenues. This has in turn led to lower foreign direct investment and a lower ability to pay back international debts.
    • Their main export partner is China, accounting for 84% of their exports. They are the most China-dependent country in the world. In comparison, China accounts for a bit over 30% of Australia’s exports.
    • Mongolia’s invitation of the Dalai Lama in November last year caused political tensions between China and Mongolia. China believe in the ‘one-China policy’ and that Tibet are an inseparable part of China, and view the Dalai Lama as a separatist. In political retaliation, China imposed tariffs and other forms of protection, harming the Mongolian economy. (HSC Topic 1)
  • An analogy can be drawn Australia’s narrow export base and subsequent persistent current account deficit. Despite this, it is commonly held that Australia’s current account deficit is sustainable in light of the Pitchford thesis, which says that the current account deficit is a result of rational decisions and therefore is not of concern.

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 six scholarships. He has experience at a top tier investment bank.

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