The rise and fall of rates

I AM sometimes asked which way interest rates will move next.

My general response is that 33.3% of economists think that they will go up, 33.3% think they will go down and 33.3% think they will stay the same.

So why is it so imprecise and how can we work it out if they can't reach a consensus?

In fact why bother adjusting interest rates at all?

Theorists suggested that the invisible hand will sort the economy out so leave it alone.

Others felt that economies take too long to correct and can suffer liquidity traps, so government budgetary intervention was required, to ease the pain.

Another later on suggested that interest rate changes might be the answer.

Currently the Reserve Bank of Australia (RBA) views an annualised inflation figure of 2-3% as a preferred economic outcome that will ensure that the economy stays in balance so we can all lead happy economic lives.

If inflation is too high, interest rates should go up thus withdrawing cash from the economy and arresting inflation. If inflation is too low, interest rates should go down, adding money to the economy. That's the theory.

When the RBA looks at the inflation rate it also checks that other indicators of economic performance are within the boundaries of what represents a good economy.

So what does constitute a good economy? Low interest rates, low inflation, low unemployment, a low current account deficit, not too high a value for the Australian dollar, reasonable increases in GDP (growth) are but a few of the many economic indicators constantly under review.

If however any of these indicators become either too high or too low they can affect other indicators.

It is a fine line the RBA must walk when managing our economic lives through interest rate changes.

Change the interest rate and there can be a flow on effect to the other indicators, for better for worse.

So, can we predict in advance the movements in interest rates and put ourselves in the maximum survival position?

Well yes and no. The RBA publishes a quarterly statement on monetary policy (cash rate changes) which is a ripping good read and gives evidence as to how they see the economy travelling.

But things can change rapidly. Shocks to economies occur often without notice.

Economics is known as the dismal science.

Be prepared but not alarmed.

Stephen Mason is an economics lecturer at Southern Cross Business School at Southern Crosss University


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