The Reserve Bank of Australia uses monetary policy to impact the Australian economy. The major tool the RBA uses within this policy is the adjustment of interest rates. Interest rates are defined as the cost of borrowing and the reward for lending money as a percentage of a given loan. The use of interest rates impacts all sectors of the economy, including individuals, businesses and government. The RBA’s monetary policy is a key tool within the Australian economy because of its profound influence in managing inflation. The RBA has stated to keep a consistent inflation rate at around 2-3%, where the current inflation rate is 3.6% (ABS). As a result, the interest rate has been adjusted to 4.35% to counteract inflation. Due to costs rising, …show more content…
For example, it aids the government in terms of managing inflation. The RBA may raise interest rates to curb inflation, helping stabilise the economy. In theory, this can lead to a reduction in inflation by 0.25% to 0.5% over time (Euromonitor). The current 4.35% interest rate is set to help return inflation to the target range of 2-3% (Reserve Bank of Australia). Because of this, it aims to balance demand and supply in the economy of all goods, which has been crucial in moderating inflationary pressures. As a result, consumer spending growth has slowed, and household disposable incomes have been under pressure, leading to reduced consumption (Reserve Bank of Australia), and thus reducing the amount of effort the government needs to intervene within society. However, interest rates also determine the fiscal policy for government expenditure. Governments face higher costs for servicing public debt with increased interest rates. In theory, a 1% rise in rates could increase the annual interest expense on $1 trillion of government debt by $10 billion (Economics Help). For the fiscal year 2023-24, total interest payments on government debt are projected to rise from 0.7% of GDP in 2022-23 to 1.0% by 2025-26 (Parliament of Australia). Therefore, the RBA’s monetary policy aids the government in their management of inflation, but requires fiscal policy to be