The Reserve Bank Australia’s Cash Rate Will Be Higher One Year from Now
Cash rates are interest rates that financial institutions pay to borrow from the Reserve Bank of Australia (RBA) or charge to lend money in the money market (Bernanke, Olekalns, & Frank, 2011). These rates are fixed maintained by RBA in Australia. The bank has a mandate of fixing, measuring and publishing these rates on a daily basis (Reserve Bank of Australia, 2012).
Reserve Bank of Australia lowers cash rates
The rate of inflation in Australia has significantly dropped in 2012 prompting RBA to cut interest rates as low as possible (Reserve Bank of Australia, 2012). In the year 2012s, the inflation levels have slipped to lowest points never witnessed in the last two decades. Prices of fruits and vegetables and other basic commodities has slide over the past eight months. Notably, the pattern of price slides is more witnessed on imported goods whereas the prices of domestically produced goods and services are climbing up. The prices of rent, electricity, gas, and rates have constantly gone up in the same period of the year (Martin, Nicholls & Zappone, 2012).
The turbulent economic condition global is greatly contributing to the cuts in cash rates in Australia. The fairly moderate inflation rates coupled with slow global economic growth triggered RBA to lower cash rate from as high as 4.25 per cent at the beginning of the year to 3.50 per cent by mid 2012. The RBA in October this year lowered cash rates from 3.5 to 3.25 per cent. According some economic analysts, it is expected that their might be further interest cuts before the end of the year (Reserve Bank of Australia, 2012).
The Reserve bank Australia’s cash rate will be higher one year from now
However, it is tipped that this scenario is not going to hold for along period of time given the volatility of the money market. According to Colebatch (2012), the cuts are not expected to go further for the next one year given contracting economic status of the Eurozone. Colebatch argues that the economic conditions in the Eurozone will result in more investment in bonds in Australia hence pushing the Australian dollar high. This condition event, as expected, will increase the rate of inflation that will force RBA to adjust the cash rates up again to accommodate inflationary effects.
The RBA in its decisions to cut cash rates is based on assumptions that the state of economic crisis is going to persist in Europe, the United States, and China. The bank assumes that inflation is going to remain unchanged hence the cash rates are going to be maintained or further cuts can be made into 2013. However, there is a risk of inflation trends that may result from inflationary pattern in the global economy if the economic patterns in the Eurozone, China, US and other Asian countries. It is good to recognize that any negative trend in global economy has a spill over effects on the Australian economy. If the financial crisis persists, the Australian financial sector growth will shrink necessitating increase in cash rates to stimulate growth in banking sector.
The cash rate cuts by RBA seem not to go down well with banks. Banks are not going to accept any further cuts in interest rates because it constrains their growth. The cuts in cash rates increase demand for money in the economy for investment purpose especially in the real estates (Bernanke, Olekalns, & Frank, 2011). This is expected to generate additional demand pressures for funds which will instigate inflation above the target levels hence prompting rising of cash rates.
The recent cash cuts by the RBA are not expected to continue beyond the next one yield. It will be quite risky for the bank to go on with the cuts basing on the likely effects that of such action. The global financial and economic turmoil which is unpredictable is likely to force the cash rates up again one year form now.