Rba on Australian Monetary Policy Outline and Term Paper

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Rba on Australian Monetary Policy

Outline and critically appraise the Reserve Bank of Australia's rationales for the current stance of Australian monetary policy.

In a scenario where Australia has been witnessing a unique mix of economic and monetary indicators, the Australian monetary policy strives to fathom the market mechanisms, both domestic and global, and lead it onto the path of sustained economic growth. The U.S. And Chinese economies have been showing an emerging trend, and seems to be all set to drive the global economy with their strong economic statistics. Nonetheless, the consumer confidence reflected even in the Australian share market in 2004, has already prepared a strong ground for it to enter the current year with enhanced prospects. The latest consensus forecasts a global growth of 4.2% in 2005, which though lower than the estimated 4.9% in 2004, is considerably a modest slowdown. Though the global economic growth may not match the high statistics of previous year, it is most likely to traverse at a pace that could gradually boost the global economic performance. The Australian economy, too, finds the global environment favorable, and it is therefore becoming inevitable for Australia to utilize this condition to register its ingenuity on the global economic map through a calculated, and concrete economic governance. The Australian Monetary policy devised by the Reserve Bank of Australia is unarguably, a comprehensive step toward a larger, yet sustainable, economic susceptibility.

Introduction

The continual decline of the U.S. dollar, as has been witnessed recently, might have been a matter of serious concern in the International Financial Market, but the tightening of the monetary policy and the financial markets by the U.S. Federal Reserve is seen as a transitory step toward economic recovery. However, it is a positive sign that the Australian dollar's movement against a host of other floating currency has been modest. Even the performance of the Australian labor market in the recent months, which indicates the unemployment rate declining to its lowest level since the 1970s, deserves appreciation.

The Australian Monetary policy comprehensively discusses the international economic development, international and foreign exchange markets, domestic economic conditions, balance of payments, recent trends and practices in Australia's resource exports, domestic financial markets, financial conditions and last but not the least, trends and prospects of inflation in the Australian economy.

Analysis

For the purpose of a reasoned analysis and understanding the rationales behind this policy, a comparative study of the same could be based on some unique parameters like GDP, Labor Market, Consumers Prices and Inflation, Business and Financial Conditions, Forex Market and Balance of Payments, and Resource Exports.

1. GDP

The U.S. economy witnessed a Real GDP advance of 0.8% in the December quarter and continues to grow strongly as it enters its fourth year of recovery. Though consensus forecasts puts its GDP growth at 3.6% for 2005, which is indicative of a slowdown from 4.4% as per the 2004 estimate; it is after all a modest one as compared to China or Japan. Coming to Japan, we notice that the real GDP grew by 0.1% in the September quarter as compared to a 0.1% dip in June. The Consensus forecast reveals a dip in Japan's GDP by 1,8% as compared to its 2004 estimate, depicting an uneven trend. Interestingly, the Chinese economy continues to perform strongly despite of slight turbulence in its actual pace. It deserves mention that China has directly accounted for a quarter of overall growth in the World economy and has to her credit similar contribution to growth in global trade. With few exceptions like Korea, other East Asian nations like Hong Kong and the Philippines too have indicated strong growth, though at a slightly slower pace. It may be noted that the overall effect of South Asian Tsunami on the GDP of the region would be modest, but its harsh effect on particular economies like the Maldives, Sri Lanka, Thailand, and Indonesia could not be denied. Even in Australia and New Zealand, the high rising domestic demand is strengthening their economies, unlike European economy that needs to channelize its domestic demand to accelerate the pace of its recovery. GDP growth slowed sharply in France and remained subdued in Germany, Italy, and the Netherlands; with Spain, being an exception in maintaining a respectable growth.

2. Labor Market

The declining unemployment rate in the U.S., as revealed by the latest statistics, is indicative of an improving labor market scenario, though with some reservations like poor employment prospects playing a major role. A remarkable growth in the temporary-help jobs, which tends to lead employment growth, provides yet another positive sign. While statistics from Japan reveal a growing labor market, other East Asian economies are also following similar, if not the same trend.

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It is however unfortunate to witness a tight labor market condition in Europe.

The Australian labor market is on the high employment growing by a considerably higher rate than the trend growth. Even the liaison reports reflect a strong demand for labor and shortages of skilled workers in a range of industries and sectors, from construction and engineering to accounting and Information technology. It seems that the RBA's rationale behind comprehensively defining the Australian labor market and presenting a comparative analysis with other emerging economies is to project employment as a key economic indicator and to help the job seekers hone their skills in exploring opportunities in the lesser conventional areas of employment.

3. Consumers Prices and Inflation

The U.S. economy witnesses a high growth of inflation and CPI (excluding the volatile food and energy components) rose by 2.2% over the year to December, up from 1.1% in late 2003. Rising household wealth and still low interest rates have provided a boost to consumption. The lifting of consumer sentiment in the recent months is reflective of an economic environment, which could be termed as 'generally favorable'. A still encouraging trend of consumer sentiments, favorable for business conditions and overall economic growth, characterize the Japanese economy. In China, the Consumer Price Inflation eased to 2.4% over the year to December, down from a high 5.3% in the middle of 2004. Surveys reveal that Korea is low on consumer sentiments because of increasing unemployment rate and it is unfortunate that similar trends have also aroused concerns in the European economy. On the other hand, parameters like high consumer's confidence, and the 0.8% rise in core producer prices in January characterizes Australia's domestic economic health. Moreover the petrol price increases continued to make significant contributions, both in the quarter and over the year.

4. Business and Financial Conditions

The business sector in the U.S. reflects a favorable trend with profits rising sharply, corporate balance sheets being healthy, and business sentiments remaining positive. In the December quarter of 2004, investment increased by 2.5% to be 9.9% higher over the year, besides the profit of non-financial corporates rising by 19% over the year to September quarter. It is however a matter of concern that the imports are now 60% larger than the level of exports, widening the external trade deficit to 5.7% of GDP. In case of Japan, business sentiment remains healthy as the overall as the financial position of the firm remains sound because of the declining corporate debt. As for the Chinese economy, production expanded by 14.4% and fixed-asset investment increased by 21% over the year to December. Moreover countries like India and New Zealand are also indicating a strong business sector, along with the European economy where Euro-wide measures of business confidence are holding above long-run average levels and all set to support a continuing recovery. Moreover, the ACCI-Westpac survey for the December quarter points to strong business conditions in the business sector. It is therefore empirically observed that the outlook for business investment remains positive, supported by high levels of capacity utilization and profitability.

The RBA's Monetary Policy carries an indicative, if not apparent logic to decrease market debt and strengthen corporate profits. The domestic financial market in Australia continues to be on the balance and is a clear indication of economic growth. The cash rate has also remained at 5.25% for over twelve months. The business credit growth remained more moderate than that for household credit.

5. Forex Market and Balance of Payment

The U.S. dollar has been witnessing remarkable depreciation against several East Asian currencies and Euro; because of which Australian dollar has also undergone resultant movements in the Forex market. The offshore movement of Australian dollar continues to dominate the movements during the onshore trading sessions, thereby triggering off a positive market sentiment. The Australian dollar recovered strongly in February after losing 0.6% against the U.S. dollar in January, thereby signaling a 2.1% gain against the greenback in February and an appreciation by 1.4% in trade-weighted terms. Even the RBA's Governor's testimony before the House of Representatives caused the bond yields to drop, though the Australian remained broadly unmoved.

With a number of emerging economies tightening their monetary policies, the European Central bank and the Bank of Japan are also….....

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