VCE Stuff > VCE Economics
End of year exam
costargh:
Yep.
ReVeL:
Ughhh... can someone help me please with Interest rates.
If theres a question on the exam regarding trends of interest rates I'm gonna shit my pants..
Ok. So in light of the current financial crisis economists have been talking of the next cut being a whole 1/2 a percent, reducing the target cash rate to 6.5%.
However, according to the RBA website, the last released CPI index in June had the inflation rate at 4.5%, way outside the target range of 2-3% per annum. So if anything, shouldn't the RBA increase interest rates? What I don't understand, is that the RBA's main indicator of the level of interest rates is the rate of inflation, so why is everyone talking of interest rate cuts?
I'm sure I've overlooked something major, hence explaining why I don't understand. If someone could help that would be great.
Thanks.
costargh:
Hint: The lag effect. I'll say no more
marbs:
Look at the way the markets are reacting at the moment, there is no way inflation will continue rising. Confidence is low as the markets are unstable.
costargh:
Look at the budgeted inflation figure. It is within the target range. With the current economic conditions coupled with the lag effect of 12-18 months (varies depending on the source you get this from), you are looking at a scenario where inflation could be very low if spending wasn't promoted or even a recession if things got really bad.
Looking at historical data is not enough to try and justify changes in the cash rate. Inflation may have been 4.5% but things have changed drastically in the last 12 months.
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