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The Reserve Bank Essay

Economy Watch reports that there has been an improvement in the global growth in the third quarter of 2005. The current trend suggests that global economic growth may reach a greater level than the average for the 1990-2004 period. IMF projected world growth at about 4.1% with developed countries growing by around 2.6% and developing ones by about 6 %.( Reserve Bank of India, 2007). Economies in Southeast Asia are developing impressively with China leading the pack at around 9%, Hong Kong about 8% and India 7%. Most advanced economies have been experiencing a drop in inflation accompanied by falling consumer prices in the US, Japan and the Euro countries (Reserve Bank of India, 2007).

The Reserve Bank of Fiji reiterates that the global economy is continuing to show positive growth, with the Australian economy exhibiting a similar trend. The growth in Australian economy is expected to get even better in 2007 (Reserve Bank of Fiji, 2007). In 177 countries of the world, Australia’s economy is ranked 3rd in terms of human development (Economy Watch, 2007). Australia’s competitive edge is maintained by the labor force growth rate of about 1.1 %.( 1997-2004) that is way ahead of other advanced economies within

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the same period. Decreased rates of unemployment rates also contributed greatly to Australia’s economic success.

An economic outlook from the 2006-2007 budget expect inflation to be moderate at about 2% in the years 2006 and 2007. The higher oil prices are likely to have a direct effect on prices of goods and services, contributing to inflation. Factors that could lower inflation are the increase in productivity and slow growth in prices of imports (Budget 2007-07, 2007).

Reuters reports that Australia’s central bank, raised interest to an all time high of about 6%, the highest ever this decade. The increasing interest rate has been the observed trend since the middle of 2002. (Reuters, 2007).  Labor markets that are tight, high demand for credit and increasing inflation are the reasons for the rise in interest rates. To keep inflation checked, a more restrictive monetary policy has been adopted which translates to an increase in interest rates (RBA, 2007)

The implication of exchange rates on a country’s economy cannot be ignored. In this case of Australia, the demand for the Australian dollar is a reflection of how International trade is faring. (McGregor, 2007). Floating the Australian dollar allows for a flexible exchange rate that serves as a cushion for shocks. It provides insulation against overseas disturbances and diminishes transfer of domestic instability to the international market.

The current increase in interest rates is likely to induce appreciation of the Australian dollar which in turn discourages exports while encouraging imports subsequently decreasing the net capital flow. From this it can be deduced the increased rates are more hurtful to the agricultural sector than beneficial to it and also explains why presently Australian exports are at their least competitive.

A decrease in exchange rates, leads to a rise in prices of farm commodities and firm inputs (ABARE current issues, 1997). This in turn increases cost of production for the agricultural sector, lowering returns from agricultural exports. High interest rates make it difficult to service debts, meet farm and general expenses making production even more difficult. (ABARE current issues, 1997). Since inflation also leads to increase interest rates, increased inflation negatively impacts agricultural exports.

The Chinese economy has been successful due to various reasons. These include a vast low-cost labour force, openness, trade, private entrepreneurship, skills and investment that have enabled China to become a critical hub for assembly of manufactured goods and electronic goods (Guo, 2006). China also faces some challenges especially in adopting new economic policies. To begin with due to one-child policy, the workforce will have an ageing problem. Income inequality among eastern cities and poor rural areas is another challenge that requires addressing. Basically, China faces domestic issues that depend on maintenance of political and social stability necessary to ensure continued economic success. (Castello, 2006).

In comparison, the Australian economy already has well-endorsed macro-economic policies. The demand from China has contributed to the resource boom in Australia and this may not last forever. (Castello, 2006). The agricultural sector is challenged especially by the 2002-2003 droughts that decreased productivity greatly.

The reform of China’s economy has had positive effects for Australian economy and global economy as a whole. Changes that China will make will require the global community and Australia to readjust their economies in response to the policy reforms.

References

ABARE current issues, Effect of Interest Rate changes on Farm Sector Incomes, August 1997 No. 6

Budget 2006-2007, Economic outlook, retrieved from www.budget.gor.au/2006-07/pdf_bst3-01.html

Economy Watch, Australia Economy; retrieved from

 www.economywatch.com/world-economy/australia/

Lachlan McGregor, Economic Implications of Floating Exchange Rates, Money Markets and the Economy, program 10 transcript, retrieved from www.abc.net.au/money/currency/features/feat10.htm

Peter Castello, 2006. Address to Australian Chamber of Commerce and Industry Annual Dinner, November 1 2006, retrieved from www.treasurer.gov.gu/tsr/content/speeches/2006/024.asp.

Reserve Bank of Fiji, Economic Review Vol 24 No. 03, March 2007 retrieved

from www.rbf.gor.fj/docs/EReview%20-20 Mar 07

Reserve Bank of India, Economy Watch, Current World Economic Overview, retrieved from www.economywatch .com/world-economy/current world-economic.html.

Reuters, May 2007 Australia Central Bank Raises Rates to Decade High Retrieved from www.cnbc.com/ib/20151066

Reserve Bank of Australia, Media Release, Statement by Glenn Stress, Monetary Policy retrieved from www.rba.gov/au/Media Releases/2007/mr_0711.htm

Rougxing Guo: How the Chinese Economy Works, 2nd Edition, 2006, Palgave Macmillan, ISBN 02030542743

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