In the contemporary period, owing to Globalisation, trade liberalisation and technological as well as infrastructural developments across the globe, the business environment in the global scenario has become more integrated, interconnected and inclusive. The businesses in a country and their operations, decisions as well as outcomes (profits, revenues, clientele, market expansions and sustainability) depend considerably on the conditions of the economy of the country, as well as on the effects of exogenous factors on the same, which in turn can be seen to be captured in the performance of the various economic indicators of the country (Holland 2018).
Keeping this into consideration, the concerned report, tries to analyse the dynamics of one of the most significant economics indicators (rate of interest) of Australia, thereby examining its dynamics and forecasting the values of the same in the coming months. Based on the same, the report tries to forecast the implications of the same on the budgets and operations of the concerned client, who is an importer of retail goods and also has a variable interest rate loan of a significant amount.
The economy of Australia can be considered to be one of the most stable and dominant developed economies across the globe. Being primarily a mixed market economy, the country ranks second internationally, in terms of the wealth per adult person in the country (Dyster and Meredith 2012). Over the years, the country has also experienced considerable growth in the industrial aspects (especially in manufacturing, mining and service sectors), which in turn has also resulted in increase in the population of the country, which also includes huge number of immigrants coming to the country from all over the world, for economic purposes.
However, the increase in the population of the country had led to huge increase in the demand for residential assets, thereby creating an investment bubble in the housing market, which can be seen with the help of the house price index of the country:
Figure 1: House Price Index of Australia over the years
(Source: Macrobusiness.com.au 2018)
The bursting of the housing market investment bubble as well as the withering effects of the mining boom in the country simultaneously took the economy of the country to a considerable downhill condition and the employment scenario of the country was also affected considerably.
However, in the last few years, the economy of the country can be seen to be coping up with the downturn and improving considerably. The current growth rate of the economy of the country is 3.4% and the economy grew at the rate of nearly 0.9% in the months of April, May and June, which highlights that the country has been experiencing a prospering economy in the recent period, unlike that of the negative dynamics few years back (Rba.gov.au 2018).
Figure 2: GDP growth rate of Australia over the years
(Source: Tradingeconomics.com 2018)
The primary reason behind the increase in the economics growth of the country can be the increase in the employment generation, on which the government of the country focussed in the recent periods, especially after the initiation of the double crisis of withering out of mining boom and housing market crisis. The increasing immigration was also a stimulus to the same (Tan and Lester 2012).
Figure 3: Dynamics in the employment rate of Australia over the years
(Source: Tradingeconomics.com 2018)
Apart from increasing the rate of employment in the country, the Reserve Bank of Australia has also taken expansionary monetary policies to provide a boost to the economy. One of the most crucial ones taken by the RBA, in the recent period, is that of decreasing the rate of interest to as low as 1.5% in the recent period, as can be seen from the following figure:
Figure 4: Interest rate in Australia over the years
(Source: Rba.gov.au 2018)
This low rate of interest, along with high employment levels, have helped in increasing the consumption and investment expenditures of the population of the country, thereby increasing the industrial and commercial activities, which together have helped in increasing the growth rate of the economy as a whole.
With the given development of the economy of the country (as can be seen from the positive trends in the GDP of the country in the recent period) the rate of interest is expected to increase by small amounts over the next six to twelve months (Manalo, Perera and Rees 2015). The rate of interest is expected to increase to near about 1.7% by the end of the year, 2018 and by the second or third quarter of 2019, the same is expected to increase to be slightly more than 2%.
The primary reason which can be attributed to for the expected increase in the rate of interest in the country is that of the increasing the consumption and investment expenditure, which if not controlled appropriately can have negative implications on the country’s economy. The inflation of the country can also be seen to be increasing slightly in the recent period:
Figure 5: Rate of inflation in Australia over the years
(Source: Tradingeconomics.com 2018)
In the presence of very low rate of interest this can go on increasing. Thus, to keep the economy stable, a slight increase in the rate of interest can take place. Thirdly, with the growth in the industrial aspects of the economy, more foreign investors are trying to set up business relations with the country, which in turn has been increasing the demand for the domestic currency, which is expected to contribute to the increase in the rate of interest in the coming months (Smales 2012).
The interest rates in the country, if increases as per the expectations and forecasts, can have mixed effects on the budgetary conditions of the concerned business. On one hand, the rise in the rate of interest in Australia, in the coming years, is expected to increase the value of the domestic currency of the country (Australia dollar), which in turn, is expected to help the concerned business to some extent, by making the imports (of retail commodities) comparatively easier (Smales 2012). This is because, with the increase in the value of the domestic currency, the company can import their desired commodities at a cheaper cost.
However, as the business has a considerable amount of variable interest rate loan, with the increase in the rate of interest, the amount of interests to be paid on the loan is also expected to increase. This is because in case of variable interest rate loans, the interest to be paid on the loan amount, varies as the rate of interest also varies proportionately with the market rate of interest. Thus, in case of the concerned business, if the rate of interest in Australia, increases as per the forecast, then the interest rate to be paid on the variable interest rate loan is also expected to increase, which may increase the cost of doing the business (Mankiw 2014).
From the above discussion, it becomes evident that the forecasted increase in the rate of interest in Australia may have mixed implications on the budget of the concerned business. However, the actual effects on the budget will depend on the magnitudes of the positive and the negative implications of the same, as discussed above.
Conclusion
From the above discussion, it can be concluded that given the recovery of the economy of Australia and the impressive growth dynamics of the economy in the recent period, the rate of interest of the country (which is currently at a considerably low level of 1.5%), is expected to increase by small amounts in the next six to twelve months, primarily due to the increasing inflation, consumption expenditures and demand for domestic currency. This in turn, is expected to have mixed impacts on the budget of the concerned business. On one hand, the increase in interest rate is expected to increase currency value, making imports cheaper. On the other hand, the same is expected to increase the loan burden of the company, thereby having adverse effects on its budget.
References
Dyster, B. and Meredith, D., 2012. Australia in the global economy: continuity and change. Cambridge University Press.
Holland, J.H., 2018. The global economy as an adaptive process. In The economy as an evolving complex system (pp. 117-124). CRC Press.
Macrobusiness.com.au 2018. The history of Australian property values – MacroBusiness. [online] Macrobusiness.com.au. Available at: https://www.macrobusiness.com.au/2013/02/the-history-of-australian-property-values/ [Accessed 4 Nov. 2018].
Manalo, J., Perera, D. and Rees, D.M., 2015. Exchange rate movements and the Australian economy. Economic Modelling, 47, pp.53-62.
Mankiw, N.G., 2014. Principles of macroeconomics. Cengage Learning.
Rba.gov.au 2018. Cash Rate. [online] Reserve Bank of Australia. Available at: https://www.rba.gov.au/statistics/cash-rate/ [Accessed 4 Nov. 2018].
Rba.gov.au 2018. Statement on Monetary Policy – August 2018 | RBA. [online] Reserve Bank of Australia. Available at: https://www.rba.gov.au/publications/smp/2018/aug/ [Accessed 4 Nov. 2018].
Smales, L.A., 2012. RBA monetary policy communication: The response of Australian interest rate futures to changes in RBA monetary policy. Pacific-Basin Finance Journal, 20(5), pp.793-808.
Tan, Y. and Lester, L.H., 2012. Labour market and economic impacts of international working holiday temporary migrants to Australia. Population, space and place, 18(3), pp.359-383.
Tradingeconomics.com 2018. Australia Employment Rate | 1978-2018 | Data | Chart | Calendar | Forecast. [online] Tradingeconomics.com. Available at: https://tradingeconomics.com/australia/employment-rate [Accessed 4 Nov. 2018].
Tradingeconomics.com 2018. Australia GDP Growth Rate | 1959-2018 | Data | Chart | Calendar | Forecast. [online] Tradingeconomics.com. Available at: https://tradingeconomics.com/australia/gdp-growth [Accessed 4 Nov. 2018].
Tradingeconomics.com 2018. Australia Inflation Rate | 1951-2018 | Data | Chart | Calendar | Forecast. [online] Tradingeconomics.com. Available at: https://tradingeconomics.com/australia/inflation-cpi [Accessed 4 Nov. 2018].
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