Economic growth tends to fluctuate in the long-term of the business cycle. Hence, when there is low aggregate demand this leads to slow economic growth. The RBA may choose to intervene by lowering interest rates to stimulate economic growth and employment. This is because lowered interest rates gives a smaller return on savings, and the fall would reduce mortgage repayments, leave more disposable income, which leads to an increase in consumer spending. Hence, by lowering interest rates, the Reserve Bank encourages spending and investment as it makes it cheaper to borrow, which leads to a higher aggregate demand and economic growth (through the increase in real GDP).
The article outlines RBA’s governor Philip Lowe most recent meeting in Queensland last Tuesday, where his message made it transparent that he plans to cut the interest rates in the next upcoming meeting in 2 weeks.
“Inflation was likely to remain low relative to the target, and that a decrease in the cash rate would likely be appropriate.
A lower cash rate would support employment growth and bring forward the time when inflation is consistent with the target. Given this assessment, at its meeting in two weeks’ time the board would consider the case for lower interest rates.” – Lowe
Hence, he plans to intervene as the economy is weaker than what his political masters suggested during the election campaign. Hence, Lowe stresses that economic growth would be forecasted to from from 2.3% to 2.75% by the end of the year ONLY IF, he cuts the cash rate to 1% before Christmas.
“Over the past three years, household disposable income has increased at an average rate of just 2¾ per cent. This compares with an average of 6 per cent over the preceding decade.
As this period of weak income growth has persisted, it has become harder for households to dismiss it as just a temporary development – as something that will pass quickly. The lower rate of income growth has also made it harder for households to pay down debt. The end result has been that many people have decided to adjust their spending plan” – Lowe
Hence, regarding what he has said above he has referred to the limitations the interest rate has at this moment to boost economic growth. He outlines that further cuts won’t boost the economy, but instead lose consumer confidence in spending and borrowing. Hence, with additional fiscal support and policies to reinforce and promote firms to expand, invest this will boost employment, leading to a rise in inflation and ultimately increasing Australia’s economic growth rate.
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