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Australia's Economic Polices Post Financial Crash

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  1. The expansionary monetary decisions of the Reserve Bank of Australia (RBA) during the six month after the global financial crisis (GFC) escalated in September 2008.

Executive Summary

The report is being prepared to present Australia’s current macroeconomics policies that the Reserve bank of Australia has adopted to stabilize the financial condition of the economy of the nation. It generally outlines the various decisions and steps taken by the Australian regulatory body during the period after the global financial crisis occurred in September 2008.

Moreover this report tries to highlight the impact of such decisions of the regulatory bodies on the functioning of the big corporate, small business, salaried people and others. How the escalated financial crisis affected the people of Australia and the Reserve Bank of Australia works to stabilize such condition to provide relief to the people. (Stevens, 2014)

This report first of all tries to gather all the facts about the circumstances and then the decisions taken by the Australian Reserve Bank about the monetary and fiscal policies in order to stabilize and slowly recover the Australian economy from the global financial crisis.

Introduction & Background

The economic state of a country is generally influenced by the decisions and working of various regulatory and the big corporate houses. A macroeconomic policy is a policy which affects the whole nation in terms of financial aspect and various other aspects.

Global Financial Crisis originates in 2007, when the bank incurred major losses on sub-prime mortgage loans. This financial crisis first originates in U.S.A but has impacted the economy of the whole nation. There were indications that during the early November, 2008 the economic condition would be worsen and would affect the economy of the country. (Borji, 2014)

It was assumed that this global crisis could adversely affect the economy of the country because:

  1. Australia had an increasing demand for capital inflow which could be worsen if the property value falls down;
  2. In the absence of international effort, protection against financial crisis may be more futile.

There are two types of policy which makes together the macroeconomics policy of a nation. These are:

  1. Fiscal policy
  2. Monetary policy

Fiscal policies are generally governed by the finance department of the government of the country. Fiscal policy deals with the financial aspects of the nation such as the import export policy, taxes both direct tax and indirect tax etc. In case of Australia the monetary policy is regulated by the Reserve Bank of Australia. (Sheridan, 2014)

The Reserve bank of Australia is involved in the formulation and implementation of monetary policy of Australia. It involves in the handling of short term interest rate.

The Reserve bank of Australia uses the monetary policy to control the inflation rate as well as the prices of the products. After the Global Financial crisis the main aim of the Reserve Bank of Australia, the main motive of the monetary policy was to maintain the economic growth of the country and control the inflation rate in between 2-3% by adjusting the interest rates in the economy.

The RBA, post global financial crisis simplifies and lower down the monetary policy in order to compensate the loss incurred by the general customers and the big business corporate who suffers the hardship due to financial crisis. (MUNOZ, 2014)

In order to maintain the economic growth and Gross Domestic Product of the economy, RBA reduces the interest rate and increases the money supply so that the individual and the big business corporates get enough money to make investment and thus leads to increase in consumption. This decision of RBA infused money in the economy of Australia, through the help of which people can make investment which in turn leads to the economic development of the country. Due to financial crisis the international funds are also not available, this mainly cause hardship to big corporate as big projects mainly dependent on foreign investment.

There was a decrease in the cash rate by RBA. Around 4% fall in cash rate was notice during the six month after the global financial crisis. The interest rate falls to 3%, which the lowest in the last 49 years, by April 2009 and the same has been continued for 5 months after which it shows a slight increase to 3.25% by October, 2009. (Australia, 2014)

The above decisions, on the monetary policy of Australia, taken by the Reserve Bank of Australia after the global financial crisis, when the world was in serious financial crisis, was proves to be prudent. The RBA had very cleverly devised its monetary policy to survive and protect the financial economy of the country; it shows that it was perfectly devised to act as a shield against the global financial crisis and to prevent its economy from recession and cause immediate recovery from the hardship. There was a positive impact of the expansionary monetary policy as devised by the RBA during the crisis, which is evident by the country’s current financial conditions. The current financial condition is characterized by:

  1. Increase in aggregate demand;
  2. Increase in investment & both capital & consumption;
  3. Improvement in the gross domestic product of the country, with 0.9% in December, 2009 as compared to -0.8% in December, 2008 quarter.
  4. Decrease in unemployment;
  5. Increase in national output

Thus from the above points it has been observed that the expansionary monetary decision of Reserve Bank of Australia proves to be beneficial to the Australian economy. Due to global financial crisis the Australian economy may come down but due to prudent decisions of RBA such thing has not occurred. The RBA takes a prudent decision by reducing the interest rate and increasing the money supply, thereby making available enough money at lower rates to the individuals and the big corporate to make investment. This decrease in interest rate and increase in money supply, increase the purchasing power of the people, they consume more commodities and makes more investment. This in turn helps to improve the GDP of the country.

Impact of Changes in Monetary policy on interest rate

Country

From 1st Jan to 1st Sep, 2008 (basis point)

From 1st Sep, 2008 to present(basis point)

Current level(percentage)

Australia

Up by 50 points

Down by 425 points

3.00

Arguments in favor of the expansionary monetary policy decisions by Reserve bank of Australia during the Global Financial Crisis.

As we have seen above that the expansionary monetary decision of Reserve Bank of Australia proves to be prudent and beneficial to the Australian financial economy. A these decisions of the RBA motivates individual and the big business corporate to invest and expend more by reducing the interest rate and infusing more money in the market. Thus leading to improvement in the national GDP of the country with 0.9% in December, 2009 as compared to -0.8% in December, 2008 quarter. Through the decision of RBA the economy of Australia improves after the global financial crisis in September 2008. (Mishkin, 2011)

Generally when the financial market is operating normally, then the main concentrate is on short term aggregate demand of the economy and the monetary policy are generally guided by the objective of achieving the inflation target. But due the emergence of global financial crisis the Reserve Bank of Australia adopted the conventional policy of reducing the interest rate in order to increase the investment opportunity. This decision was taken to response appropriately to the contraction aggregate demand and due to the downfall in the global financial market. With the deterioration of the global financial market access to the foreign loan has become difficult and expensive. Thus in order to support the investment and maintaining the economy of the country RBA take a very good expansionary monetary policy decision. (Melé[email protected], 2012)

Not only Australia, many other Central Bank of the concerned country worldwide take the same initiative. In case of United States, it rapidly reduces the target federal funds to 0 – 25 basis point by December, 2008, in compare to 525 basis point in September 2007. Almost every country has adopted the same policy by reducing the interest rate to encourage investment. On an average interest has been reduced by around 330 basis points in developed country and by 300 basis points in the developing countries. (RBA, 2014)

I personally favored the expansionary monetary decision of Reserve Bank of Australia, as if it wouldn’t had taken such decision the economy of the country might have gone into recession. Since the condition of the global financial market is disastrous, the Australians do not have an easy access to the global financial market.

As we now that now a days the market has been highly globalized, thus dependence on foreign financial market has increased much. Thus in global financial crisis condition, the Reserve bank of Australia has taken a perfect decision of reducing the interest rate and increasing the money supply so that the money is available from the country itself to make investment and the Australian people do not have to wander for foreign investment. (Thornton, 2014)

Arguments against the expansionary monetary policy decisions by Reserve bank of Australia during the Global Financial Crisis.

So far we have analyzed the favorable impact of the expansionary monetary policy decisions of RBA which benefitted the economy as the whole. But we cannot overlook certain flaws of this expansionary monetary policy. The monetary expansion policy favored the economy on one side but it has negative impact on the fiscal condition of the country. We know that the generally the main objective of monetary policy of any economy is to meet the inflation target in order to stabilize the security market condition of the country. In formulating any monetary of fiscal policy of a country, the regulator of such policy is required to keep in mind there must be an exit strategy from such policy in the long run. The Australian economy faces budgetary deficit due to high dependence on foreign capital. We know that a stable condition should prevail in the securities market, it should not be volatile, and otherwise it would drastically affect the financial market. For this condition to prevail a stable inflation rate is required. But due the expansionary monetary policy of the RBA the inflation rate remains unstable, which leads to fluctuation in the price of the securities in the stock market, and thus adversely affecting the economy as whole. (Battellino, 2009)

The decisions taken by RBA have not taken into consideration the time by which the recovery from such financial crisis is to be made. We know that the Australian economy is greatly depended on the foreign investments, but due to global financial crisis access to such market has become difficult. Thus to improvise the economy, the Australian government infuse money in the economy and reduce interest rate to provide support for investing activities. Such decision was short term without any knowledge about the time period by which the recovery would be made. Now this reduction in interest rate though increases the investment thus an improvement in the economy, it also leads to an increase in the inflation rate than targeted. Moreover due to decrease in interest rate the revenue of the Australian government also decrease which has adverse on development of the economy in the long run.

Summary & Conclusion

From the above analysis we have observed that overall the expansionary monetary policy decision of the Reserve Bank of Australia during the six month after the Global financial Crisis was prudent and beneficial to the Australian economy. As the Australians were highly depended on the foreign financial market, the global financial crisis would have adversely impacted the Australian economy and may bring recession into the economy if RBA had not taken the decision of reducing the interest rate. This is evident by maintaining a proper GDP even during the global financial crisis. Thus the decision was a sound one.

The main target of RBA was to stabilize and recover the Australian economy from such financial crisis which is achieved by the decision of RBA as the gross domestic product of the country improves, with 0.9% in December, 2009 as compared to -0.8% in December, 2008 quarter. Thus the short term benefit of controlled GDP was achieved by increasing the investment. But it leads to an unstable Australian stock market in the long run due to fluctuating interest rate.

There are many factors which affect the Australia’s financial market but here I have concentrated on that matter which aided the Australian economy to avoid recession and to protect against the global financial crisis.

Works Cited

Australia, A. &. (2014). Economic Analysis - Credit Slowdown To Prompt Rate Cut - SEPT 2014. Asia Monitor , 1.

Battellino, i. (2009). Global Monetary Developments1. RBA , 1.

Borji, H. (2014). Monetary policy outlook unchanged, RBA minutes reveal. Finances , 1.

Melé[email protected], E. D. (2012). Australian Central Bank Eases Monetary Policy On Gloomier Reassesment of the Economy. International Business Times , 1.

Mishkin, F. S. (2011). MONETARY POLICY STRATEGY:. In F. S. Mishkin, NBER WORKING PAPER SERIES (pp. 1-63). Cambridge: NATIONAL BUREAU OF ECONOMIC RESEARCH.

MUNOZ, D. (2014). Australian central banks say low rates to stay,economy picking up as expected. Reuters , 1.

RBA. (2014). Minutes of the Monetary Policy Meeting of the Reserve Bank Board. RBA , 1.

Sheridan, E. (2014). Reserve Bank of Australia (RBA)’s Statement on Monetary Policy out now – headlines. Forex Live , 1.

Stevens, G. (2014). Monetary Policies. RBA , 1.

Thornton, H. (2014). Australia's monetary reform needs a revamp, and Australia badly needs bold economic reform. US Fed now (implicitly agrees. Henry Thornton , 1.

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