Last week the Australian government announced that the update of government finances includes substantial revenue write-downs since the May budget, a larger budget deficit in the next few years and $17.4 billion worth of cuts. The release of the government’s August 2013 Economic Statement just days before the start of the election campaign has led the opposition to seize on the area of economic management in order to criticise Kevin Rudd and Labor. Treasuer Chris Bowen declared that the Chinese mining boom was now over and that the Australian economy is in a transitional phase. Claims that the Chinese resources rush has faded has been disputed by BHP which says that demand for Australian minerals is still able to sustain the economy in the coming decade. The estimated deficit for the government is projected to be $33.3 billion over the next four years.
Download the Australian Government’s Economic Statement for August 2013.
Earlier this week on Tuesday, the Reserve Bank of Australia governor Glenn Stevens announced that the monetary policy through interest rates would be loosened. As a result the official Australian interest rate was reduced by 0.25% from 2.75% to 2.50%. In the RBA governor’s immediate statement associated with this interest rate cut decision, Mr Stevens cited that Australian economic growth was slightly under-performing although this is expected to change with improvements to occur over the next 12 to 18 months. The value of the Australian dollar has also taken a hit recently with the exchange rate sitting now at 1 AUS/ 0.90 USD.
|What does the commuter at Parramatta have to do with this?|
Both the Labor government and Liberal opposition parties have tried to capitalise on Tuesday’s interest rate cut decision to gain political advantage in the election campaign. Prime Minister Kevin Rudd has indicated that the interest rate cut is in line with the good economic management of the government which will help families and lower household costs especially for those with mortgages. Shadow Treasurer Joe Hockey has hit back at those claims of the Labor government’s good economic management citing that the Australian economy is worsening.
“Monetary policy refers to the actions taken by the Reserve Bank of Australia (RBA) to affect monetary and financial conditions in the money market (also known as the cash market) to help achieve economic objectives of low inflation and sustainable growth.”1
The Reserve Bank of Australia which is not directly controlled by the Australian government sets the interest rate for Australia usually on a monthly basis. The decision to raise or cut the interest rate is based on the Australian economic outlook in the coming year as monetary policy is a medium-long term influence. Below is a guide to show who benefits from an interest rate rise and cut, and who loses from an interest rate rise and cut.
Interest Rate Rise Winners: Banks, Creditors, Term Deposit Holders, Self Funded Retirees
Interest Rate Rise Losers: Home loan holders, (Business) borrowers/debtors, exporters
Interest Rate Cut Winners: People with mortgages, People that owe banks money
Interest Rate Cut Losers: Banks, Creditors, Term Deposit Holders, Self Funded Retirees
So there we can see that this is a complex relationship between interest rate changes and the Australian economy. There are always both winners and losers in regards to any interest rate changes. It is really about how such decisions are interpreted and especially how they are portrayed to the Australian public that will have the most decisive effect. A slowing economy is cause for an interest rate cut to stimulate consumer spending but also an interest cut brings relief to families with mortgages. So let the spin continue…
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This article was first published in AustElection2013