Upsurge in Australian Benchmark Interest Rate: Impact on Economy

The central bank of Australia has modified the standard rate of interest. It is the second time that this has happened in the space of a month. The costs of borrowing have touched their pinnacle in the last 12 years. As an inevitable result of this the common consumers as well as the various business entities have had to reduce their expenditures to a significant extent.

The board under Governor Glenn Stevens has increased the target for overnight cash rate by the quarter of a point. At present the figure stands at 7.25 percent. This has come in the heels of the modifications that were made in the months of February, August and November that were made with the sole purpose of checking the quickest inflation after 1991.

The currency of Australia has been experiencing phases of instability as the expenditures of borrowing have gone up significantly since the middle phase of the last year. The huge increase in the borrowing costs is different from what has happened in countries like the United States of America, United Kingdom and Canada.

The Reserve Bank of Australia has not played a good role in terms of preventing this economic instability as it is being felt in certain circles that it would have taken a more pro-active role in the overall situation. The value of the Australian dollar has come down from 93.77 US cents to 92.87 cents.

The yield of the government bond with a maturity period of two years has come down to 6.56 percent. This means a reduction of 15 basis points and every basis point is equal to 0.01 percentage point. The traders have had to change their attitude after the crisis that occurred today.

There is only 32% chance of a quarter-point reduction in the coming one year. Last week there was 84% chance of the rate of interest reaching 7.5%. There has been considerable reduction in the expenditures of various households as well as the overall financial scenario of Australia.

The growth in the retail sales in Australia had unexpectedly and suddenly stopped in the month of January this year after consistent increase for a period of seven months. Since the month of May in 2002 this has been the 12th time the rate of borrowing has increased. At that time the rate was 4.25%.

All these have contributed to the increasing of the gap between the standard rates of interest in Australia and the United States of America to 4.25% points. This is the biggest gap in a time span of four years. In order to get a rate of inflation of 2 to 3% the financial authorities in Australia have decided to tighten the financial policies in Australia. The rate of core inflation in Australia has gone up to 3.8%.

The Australian economy has grown in the last one and a half decade at a steady rate with some reductions that have occurred few and far between. The rate of people without jobs has come down 4.1%. As per the data of the Housing Industry Association the home loan borrowers in Australia would need to pay A$ 42 more on their monthly installments.

The rate of inflation is supposed to rise in the next few months and may come down only in the next year. Inflation may rise due to increase in the expenses of commodities like fuel, housing and food. The present account deficit of Australia has reached an unprecedented level of A$ 19.35 billion. This has been owing to the problems in the transport sector of Australia.