Dilemma currently faced by the RBA - Essay Example

Dilemma Currently Faced by the RBA The Reserve Bank of Australia met on March 6, to discuss the dilemma currently facing its conduct of monetary policy. The RBA recognized that while the global economic was in recession most major regions had witnessed steady improvements. While major downside risks remained, the probability of another major catastrophe seemed extremely limited. Domestically, however, the committee recognized that the economic continued to undergo significant structural adjustment because of high terms of trade and the accompanying high exchange rate.

As a result it became the RBA’s dilemma to decide whether they should change interest rates. There were a number of issues the RBA had to consider in making their decision. One of the central concerns in these regards was the determination of whether the adjustment was occurring at a pace that kept the country close to trend and inflation in the target range. The board looked at different sectors of the economy and recognized that while the housing sector was in decline the mining and service sectors were expanding.

The board also examined behavior from the major banks. They noted that they had passed on many of their higher funding cost pressures; these figures did not indicate anything out of the ordinary. While these conditions seemed apparent there were members that considered their assessment mechanisms might not be entirely accurate. For instance, disparate forces such as the large rise in resource investments and the high exchange rate could have potential impacts. While most of these domestic indicators appeared stable, the RBA recognized that international factors could potentially create an adverse impact.

Most central to their concerns was the tumultuous situation in Europe. They recognized that this situation, as it impacts the trade of flow throughout the globe, could ultimately impact Australia. The main link to the Australian economy would be if Europe enacted a slowdown in East Asia, which in turned reduced Australian exports. Specifically, this chain effect would potentially limit demand for commodity prices. Continuing with European concerns, the RBA recognized that a slowdown in European markets or even collapse could potentially reduce global capital investment; this would then impact the exchange rate and consumer confidence.

Still, the RBA recognized that as long as inflation remained stable they would be able to counter such a slowdown with specific policy measures. In conclusion, this essay has considered the dilemma the Reserve Bank of Australia faced at their March 6, 2012 meeting. The report has demonstrated that the RBA considered both international and domestic factors. Specifically, there was concern over the economy’s structural adjustment to the very high terms of trade and the accompanying high exchange rate.

The main challenge to these adjustments was the potential uncertainty in Europe which could potentially impact a situation where demand for Australian exports declined. Ultimately, the RBA concluded there was no significant action that needed to be taken and decided to leave the cash rate unchanged at 4.25 per cent. References ‘Minutes of the Monetary Policy Meeting of the Reserve Bank Board.’ (2012)