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Global economics

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An Evaluation of Australian Monetary Policy
Recently the Central Bank of Australia decided again to cut interest rates. The policy was defended on the grounds that low inflation levels indicate that easy money policies in the past have not lead to inflation. Thus, given the economy is still sluggish, see the high unemployment rate, a cut would be justified. Even though reserve bank governor Glen Stevens indicated the policy won’t be that effective given low inflation rates governor Glen Stevens also believes it will not harm anything either. Mr. Stevens indicated clearly that low interest rates do not stimulate spending as much as they use to. The reality seems to be, at this time, that it is like pushing on a string. You can lower interest rates as much as you like but people just don’t’ want to spend. People don’t want to spend or make high risk investments. Thus the economy seems to be stuck with low interest rates, low investment and low spending. This is what the low inflation rate indicates. Thus as long as inflation is low you may as well pull down the leaver of interest rates towards zero. When you begin to see inflation then you start to reverse the process. The big caution is that inflation is not that easy to measure, perhaps we have seen inflation already; we just haven’t been able to detect it just yet. Thus the concern, if inflation suddenly kicks into high gear can the Central Bank hike interest rate, and use tight money policies, fast enough to offset the rise? The reality is no one really knows, so it is a risk free game that the Central Bank of Australia is playing.

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