Last year, Reserve Bank governor Philip Lowe had to stare down critics who argue
ID: 1151419 • Letter: L
Question
Last year, Reserve Bank governor Philip Lowe had to stare down critics who
argued he should be slashing interest rates to boost sagging economic
activity.
Now, he's under fire for not hiking interest rates to take some heat out of the
dangerously overheated Sydney and Melbourne property markets.
But, as its latest Statement on Monetary Policy makes clear, there are solid
reasons for the Reserve Bank to ignore these calls.
In the first place, low interest rates are playing an important role in supporting
fragile consumer spending.
Although household consumption growth picked up a bit late last year, the
Reserve Bank expects this will likely prove temporary.
Instead, it believes that future rises in household spending are likely to be
modest, reflecting the weak increase in household income. What's more, high
household debt levels are likely to make consumers more tentative.
As the statement notes, surveys suggest that households' perceptions of their
personal finances have been declining since late last year, with more people
taking the view that it is better to use savings to pay off debt, rather than to
invest in real estate.
Similarly, higher interest rates would be likely to discourage private sector
investment, which is already running at low levels as a share of GDP.
Although miners are benefiting from the lift in commodity prices since the end
of 2015, the statement notes that "this has not led to a material increase in
new investment or employment in the sector, partly because the increase in
prices is not expected to be sustained".
Instead, miners have used the extra income they've received to pay down
debt, or to reward shareholders with higher dividends or share buybacks.
And the Reserve Bank appears somewhat pessimistic about the outlook for a
recovery in investment by non-mining companies.
Although there are some signs that this is occurring in NSW and Victoria,
it remains "relatively weak" in Queensland and Western Australia.
2
According to the article by Karen Maley, higher interest rates are likely to push the AUD higher. If the AUD appreciates relative to other currencies, foreigners will import: 4.5. OA. A higher quantity of Australia's goods and services O B. The same quantity of Australia's goods and services O C. It is unknown what the effect on Australia's goods and services will be D. Alower quantity of Australia's goods and services Submit AnsweExplanation / Answer
Correct option is (D).
When AUD appreciates, it takes more units of a foreign currency to buy one unit of AUD, therefore Australian exportable goods become less competitive in global market. Foreigners demand less quantity of Australian goods and services.
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