BUSINESS
1 November 2011
Australia lowers rate to 4.5%
in a bid to boost growth
The Reserve Bank of Australia (RBA) has cut interest rates in a bid to boost
growth amid fears of a slowdown in the global economy.
The central bank lowered its key rate to 4.5% from 4.75%, the first cut since April
2009.The move comes amid fears that the debt crisis in Europe and slowdown in the
US may hurt global economic growth.
RBA said it was concerned about the impact of global uncertainty on its economy
and apart from the global pressures; the central bank has also had to deal with a
slowing domestic demand.
While Australia's resources and mining sector have been booming, other areas of
the economy such as retail sales have witnessed a slowdown in recent times. "In
other sectors, cautious behaviour by households and the high exchange rate have
had a noticeable dampening effect." the bank said.
"The RBA's decision to cut rates by 0.25% is an admission that domestic demand is
feeling the pressure," said Peter Escho of City Index."Clearly, the RBA is using its
toolbox to cushion the impact," he added.
Moderating inflation
While falling consumer demand has been a concern for the central bank, it has also
helped to slow consumer price growth in the country.
As Australia witnessed an economic growth powered by a boom in its resources
sector, the RBA repeatedly maintained that keeping inflation in check was among its
top priorities."The subdued demand conditions and the high exchange rate have
contained inflation more recently," the bank said.
According to the Australian Bureau of Statistics the consumer prices rose 0.6% in
the July to September quarter, compared with a rise of 0.9% in the previous three
months. The bank added that it expected inflation to stay within its target range of
2% - 3% in 2012 and 2013, as pressures on consumer prices ease, and labour costs
outside the resources sector moderate.
Questions
1. Explain what is meant by the term ‘interest rate’. (2)
2. Using an AD/AS diagram, explain how a cut in interest rates is expected to
affect the macro-economy. (6)
3. Discuss the effectiveness of cutting interest rates in an attempt to ‘boost
growth’. (18)