Australia Interest Rates

by Oct 2, 2019Market Reviews

Australia Interest Rates

During the September meeting, the Reserve Bank of Australia lowered its’ official cash (OCR) rate for the third time this year, to a new record low of 0.75 percent, cutting rates by 25 bps. The Reserve Bank has stated the rate cut has been to support employment and income growth for the Australian economy. Aiming to provide greater confidence that inflation will be consistent with the medium-term target.

Furthermore, Australian Policymakers signaled the need for an extended period of low interest rates, stating the central bank is prepared to continue the monetary policy ease if needed.

Interest rate cuts almost always result in the devaluation of a nation’s currency, and it has been no different for this rate cut. With the AUD/USD continuing strong downward movement this month following the Reserve Banks’ announcement. The Aussie dollar currently trading at $0.66985 level.

However, historically monetary policies have proven to be effective only in the short run, as money neutrality takes effect in long-term periods. The idea that money is neutral is derived from economic theory that explains, as a Reserve Bank increases the money supply, it essentially means an increase cash in the consumers pocket, driving up consumption of individuals, in turn pushing prices of goods upwards. Thus, in the long run inflation neutralises the increase in money supply.

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