Australian Policy and Monetary Policy Effectiveness

Question: Discuss abot theAustralian Policy and Monetary Policy Effectiveness. Answer: Introduction This paper will focus on a particular country and then see how the Central bank policies are overall impacting the situation in the country. The country of choice for this paper is Australia and the Central bank of the country is known as Reserve Bank of Australia. The paper will evaluate the objective and roles of the Central Bank and then look into the various macroeconomic indicators of Australia. Then the paper will explore the recent comments by Treasurer Mr. Morrison on the effectiveness of the monetary policy and finally paper will provide some recommendation which the country can look up to in the current scenario. Role of Central Bank in the Economy In this paper the country I have chosen for my assessment is Australia. The central bank of the country is known as Reserve Bank of Australia. The main objective of the Reserve Bank of Australia is guided by the Banking Act which was passed in 1959 (Cao, 2015). The main objective of RBA is to control inflation and maintain proper currency flow in the economy of the country. The other objective which overall guides the main objective is to maintain financial stability in the country and maintain high level of employment for the residents of the country. The banking act passed in 1959 is the governing regulation for RBA. The regulations of the Banking Act impose certain methods which can be used by RBA to perform its objective. The Central theme of these methods is the monetary policy stance which RBA need to work on. The monetary policy stance which the bank takes helps in determining the cash rate in the economy and in turn controls the money supply in the country. The ultra-lose mon ey policy is indicative of the fact that RBA is having focus on increasing money supply, increasing purchasing power and also to provide necessary push to the growth in the economy. On the flip side, tight monetary policy is indicative of controlling the money supply, reducing the inflation and also to control the excess liquidity in the system. The central bank of the country, Reserve Bank of Australia (RBA) is also responsible under the banking act to keep zero level of unemployment. This is a kind of ideal situation and in the practical world scenario the RBA is not able to meet that target. The primary role of RBA is to control inflation in the economy and maintain the financial stability of the country. RBA acts as the banker to the Government and all Governments banking need are taken care off by RBA. The tools available with the RBA are the monetary policy action and maintaining the currency flow in the country. As per the act the roles of RBA are broadly defined under three categories. These three broad categories are stability of the currency in the country; maintenance of employment in the country; and finally work for the economic prosperity of the residents (Manalo, 2015). Mr. Morrisons View on Effectiveness of Monetary Policy In this article, Treasurer Mr. Morrison highlights that in current situation how the central bank has reached a limit whereby it cannot reduce the interest rate further. He also argues that in the era of low interest rate, in some cases negative interest rate, monetary policy has lost its power to influence any major changes in the economy. He highlights that this is one of the major concerns which all major economies are facing in the current situation. The current cash rate in the economy is standing at 1.5%. However, Mr. Morrison also stated that his statement should not be taken up as a concern for RBAs independence but is only indicative of the fact that rates wont reduce any further in the coming times. The concern of the treasurer are pretty accurate, the ability of central banks all over the world to transmit policy actions to last mile in the population is questioned. Let us also take an example of India, where Central Bank has reduced benchmark rates by 1.5% in last 18 mont hs, but commercial banks have only been able to transmit some 0.60% to 0.75% to the consumers and corporates. This is happening across the world, take example of Europe which is facing constant period of deflation for last two years and even negative interest rates are not able to spur up demand. In a recent interview, the treasures Scott Morrison signaled that Reserve Bank of Australia now has limited capacity left to reduce interest rate any further (Robinson, 2015). He argued that in the world of such low interest rates, in some cases even negative interest rates, the monetary policy as a tool as lost its effectiveness. The ability of the monetary policy to create an impact and then influence matter in the economy is diminishing at a faster rate (Cao, 2015). He clarified in the same interview that he is not even questioning RBAs independence and his comments are not in that regard, but the current economic system has exhausted the effectiveness of the rate cut. Discussion on Effectiveness of the Monetary Policy Mr. Morrison in the article highlights how effectiveness of the monetary policy is diminishing across the world. I believe in the current situation this holds true. In a recent paper by IMF, the writer singles out Folk theorem and highlights how the increasing dependence on interest rate and quantitative easing to bring out a country of economic doldrums is nowadays yielding mixed results. The interest rate is increasing become highly ineffective, however quantitative easing is still yielding mixed results. The paper has done detailed study on different countries and the prevailing scenario in those economies. Some of the limitations which are now visible in developed economies are deflation and liquidity traps. Euro zone is a classic example of how the region is facing deflation and is not able to come out of it even after strong quantitative easing support and negative interest rate. Markets all over the world dont function as silos anymore (Manalo, 2015). The interlinking of trade , growth in globalisation has made all central banks to be dependent on one another. The central banks all over the world are dependent on each other and stance which they hold. Monetary policy tends to become ineffective if the discussion has no orientation and synchronization with what is happening in the world outside. Concern on the Long-Term Rating of the Country In current times Australia is also facing a concern related to long term rating of the country. Six months back global credit rating agency Standard Poors reduced the investing outlook of the country from stable to negative. The rating agency at that time has warned the Government that there is an urgent need to reduce the budgetary deficit which was rising at alarming rate. Currently SP has again warned the country that they might downgrade the rating of the country from AAA. This is cause of worry for the country as the rating downgrade will hurt the investment outlook and in turn will also impact the cost of borrowing. This will also increase the risk premia that foreign investors will demand from Australian investments. The increase in risk premia means the country wont be kept in same bracket of investment as it was used to be. It is only six months back when SP lowered the credit rating outlook of the country from stable to negative. This was the first such strong warning from the rating agency stating that AAA status was under visible threat. The rating agency warranted such action with rationale that country need to address is budgeted deficit. The key problem identified by SP is not the Federal debt, it is the record housing debt which the country is facing. This debt is significantly funded from the overseas market and as per rating agency this is one of the biggest risk that the country is facing (Manalo, 2015). At one end of the spectrum there is a requirement to push for growth so that savings can increase, however on the flip side the rate cutting capacity of RBA has diminished. Coupled with that even if RBA does a rate cut, effectiveness of the same is really doubtful in Australian economy. Major Economic Indicators Some of the major indicators for the current state of Australian economy are: As per the last available data on the GDP, the country has grown by 3.3% in The inflation in the economy has averaged at 1.3% The cash rate maintained by RBA stand at 1.5% The population of the country stood at 24.1 million and it is growing with an annual growth rate of 1.4% Unemployment rate in the economy stood at 5.6% and around 12 million people are currently employed in the system The services remain as the largest contributor to the Gross Domestic product with its share standing at 59%, followed by 9% in the construction sector, 7% in manufacturing, 6% in mining and 5% in retail trade If one looks at the debt levels of the country, they would be able to visualise the real risk matrix of the country. It is not the government debt which is the cause of worry, it is the debt which has been provided by foreign entities to housing sectors and the dominant commodity sectors. This is the biggest risk concern which has been raised by global rating agencies. The housing market is facing lot of trouble, the demands are muted; people are seeing foreclosures as the only option and new demand is not turning up to prepare for the cash flow of the previous demand. The global issues are hurting the country and hence monetary policy easing stance has been maintained for long. Some of the major global issues which have hurt the economy in recent times are Brexit and the outcome of the United States presidential election. Both the results have not been in favour of investor expectations and that is one of the major reasons why fund outflow has taken place from investment destinations like Australia (Cao, 2015). What are the Estimates of Growth for the Country? As per OECD estimates the growth is expected to be 3% in 2018. There wont be any strong inflationary pressure in the economy as even some fall in unemployment rates will only reduce inequality. The OECD expects monetary policy tightening to start from the end of 2017 and this is in line with the stance of majority of developed nation. The monetary policy tightening is a necessity as per OECD, as it will unwind the current tension due to low interest rate environment, establishing some control on the situation in the housing market. The Government of Australia is looking forward to a strong period of fiscal consolidation. Some of the structural reforms which the government should implement are improvement in the tax structure. What are the GlobalIssues which are Hurting the Economy? The global issues like Brexit and outcome of United States Presidential election has increased the overall volatility in the global financial markets. Markets dont like uncertain environment and both these events have increased the quotient of uncertainty in the system. On the Brexit issue, markets want to see how the exit happens and what the terms under which it will happen are. Some of the critical question which Brexit has raised are; whether the Euro survive as a region with single common currency post Brexit; will other countries follow the same suit as happened with Britain; what will be the economic impact of Brexit; how will be the overall trade impacted from Brexit. On the other side unexpected win of the Republican candidate Donald Trump in the recently concluded United States election has again increased overall uncertainty quotient in the system. Some of the concerns which market foresee are; Whether globalisation will reduce in Trump era; what will happen with trade rel ations and pact which exist with Japan and China; what will be stance of Trump for the outsourcing industry; will the developed economies like United States become more closed in the upcoming times. These global issues are few of the major issues which the Government and RBA are facing. The Government is not in a position to reduce fiscal deficit by curbing spending as private capex is not picking up and it is the public spending which has driven the growth in the recent times. Coupled with this problem, RBA is not in a situation to provide any further rate cut because of long period of ultra-lose monetary policy. This double whammy on the economy of Australia is one of the prime problems which the country is facing. Industries and the related lobbies have been asking for low cost of borrowing so that next part of private capex can start. However the duration of lose monetary policy has already stayed for long and the current environment needs some tightening or status quo maintenance. The credit rating agencies are asking the Government of Australia to tighten the fiscal spending so that the deficit can be lowered. There main concern rises from the kind of debt which the housing market is standing on. Coupled with that the situation in the commodity market is also not improving and the Government is also not able to clearly predict the kind of pricing the key commodities in the country will be seeing in the near term. This is generally not the case but the global factors are definitely having its say and are raising the concern with the country. Authorised Deposit Institutes and their Workings Authorised deposit institutes in Australia are corporations which are governed under Banking Act, 1959 of the country. They are authorised to take deposits from the customers and hence governed by the Act. These institutions include the banks, credit unions and building societies. They effectively manage liquidity, interest rate risk in similar manner as the banks and other money market related companies. However if they are not operating as banks the reporting standards are different and format of working is also significantly different. Recommendation Some of the recommendation which the country can look forward to is releasing bonds in different denomination to take care of dollar denominated debt in the housing market. Once the housing market sees signs of revival, then the next step is to start monetary tightening and also focus on reducing fiscal deficit. The reduction in fiscal deficit and improvement in housing market scenario, will pave ways to avoid any rating downgrade. Hopefully the global environment during this period would be stable and there wont be any additional risk. Conclusion Monetary policy as a tool for establishing control over the financial stability of the country has lost it means by some degree due to impact of globalisation, more demand oriented economies. This is the prime reason why countries like Australia, European region are seeing that current monetary policy measures or quantitative easing is not leading to desired results. As per the FORK theory developed by wall street journal IMF this is increasingly becoming a challenge and still quantitative easing is helping matters but cash rates are seeing reduced impact. Recently markets all over the world has turned volatile due to the impact of Brexit and also due to the outcome of the recently concluded United States Presidential election. The victory of Republican candidate has increased the volatility of the system. This is one of the reason why policy actions and budget repair actions taken by Australian government has not been so effective. The reduction in fiscal deficit and improvement in housing market scenario, will pave ways to avoid any rating downgrade. References Cao, L., Hosking, A., Kouparitsas, M., Mullaly, D., Rimmer, X., Shi, Q., Stark, W. and Wende, S., 2015. Understanding the economy-wide efficiency and incidence of major Australian taxes.Treasury WP,1 Georgiadis, G. and Mehl, A., 2015. 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