Accounting and Finance
Australian economy is one of the rising economy that has been facing growth since last 27 years and considering the US economy is one of the largest economy that has faced large amount of growth until 2006 and since then the economy is pushing itself hard to gain the position where it was(Ziegeret al. 2018). Australian economy is expected to grow at 3% annual rate since 2018 and on wards from 2019 the growth rate is expected to rise further. Contrary to this, US economy is growing at 2.9% rate and during the next one year it is forecasted that the economic growth rate of the state will fall by 0.2% leading to deterioration of the overall economic performance of the state (Märkle-Hußet al. 2018). There has been substantial amount of liquidity in the market in the case of the Australian economy that has enforced the country’s economy to hold their cash rate. On the other hand, US economy has been facing sharply rising liquidity in the market, however, this is comparatively lower thanits peer economies.
During the last five years it has been seen that there is substantial amount of growth in the trade between the Australia and US making the demand of the Australian dollar to rise. On the other hand, the US economy is in slump that has making its dollar value constrained within certain limit (Alexander er al. 2018). With rise in the demand of the Australian goods and services and slump in the US economy has been aiding the Australian Dollar (AUD) to rise. Unemployment rate in both the economy has been falling and the inflation rate in the Australian economy has been reduced considerably allowing the economy to have a better economic condition.
As it can be seen that the Federal bank of the US has increased the official interest rate in order to entice the investment from the foreign investors in order to enhance the availability of the fund. Under this scenario, if the government of Australia fails to take effective monetary policy, then it will loss much amount of the investment because the Australian economy has been facing large amount of investment from the US and the European Union nation. However, it can be seen that the economy of Australia need to keep their cash rate, which is the interest rate in terms of the western economies, fixed in order to provide the economy good amount of growth (The Sydney morning herald 2018). As the economy is under an equilibrium condition, market has been facing balanced growth, which may be altered if the reserve bank of India increase the interest rate while reducing the liquidity in the economy.
Money market of both the economy has been performing positively in order to provide much amount of growth to the respective economies. However, in order to achieve more amount of foreign investment, the economy has increased its interest rate or the cash rate. Under this situation, with the rise in the interest rate, the economy will have reduced liquidity in the market, whereas, the economy of the Australia has considerably kept its interest rate unaltered considering the forecast that utilizing the present situation of the market, the economy will enhance by 3% in the coming years (Robinson and Wang 2018)
As it can be seen that, with the rise in gap between the interest rate of the Australia and US, there has been substantial amount rise in the demand of the Australian dollar in the US market. It has appreciated the Australian dollar in terms of the US dollar. In presence of the slump in the economy and less demand of the USD, currency of the US has been depreciated in terms of the AUD making the exchange rate fall. In this situation, the Australian Reserve Bank need to keep its present interest rate that will allow the economy to have growth at the predicted flow (Tradingeconomics.com 2018).
With the higher interest rate by the US Federal Bank, stock market of the Australian economy will have better growth in their stock market as compared to the US economy. With constant interest rate, Australian economy can hold consumer confidence on its economy by a larger amount compared to the US economy. Thus it would have been an ideal option for the Australian economy to keep the interest rate unaltered.
FED and RBA are the central banks of the US and Australia respectively. These entities are entitled to take monetary policies in order to stabilize the economy if the situation deems so. In this report it can be seen that the FED has increased its cash rate, where the RBA has kept it constant showcasing the organizations are liable to take monetary decisions based on the performance of the economy (Heard et al. 2018).
As the US Federal Bank has enhanced the interest rate, it will increase the demand of the labor. With the rise in interest rate, there will be more job creation and the demand of the labor will rise in the US economy enhancing the overall output of the economy. Contrary to this, there will be slight decrease in the labor demand in the Australian economy due to the fall in the investment from the foreign investors. However, with the unaltered interest rate there will be rise in the trade volume, which will enhance the employment for the Australian economy too, balancing the ups and downs of the labor market in the economy.
With the higher interest rate by the US Federal Bank, demand of the Australian dollar will fall and the exchange rate will also fall, leading to rise in the export volume from the Australian economy to the US economy. Under this situation, it can be depicted that the Australian economy need to keep its exchange rate unaltered as it will enhance the trade balance of the economy (Kuzmina and Kuznetsova 2018).On the other hand, with the rise in the interest rate, US economy is expected to enhance its trade balance through higher comparative price of their product and service in the Australian economy.
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Robinson, T. and Wang, J., 2018. The Australian Economy in 2017–2018: The Importance of Stronger Non?Mining Business Investment Growth. Australian Economic Review, 51(1), pp.5-20.
The Sydney Morning Herald. (2018). Australian dollar jumps on back of US inflation data. [online] Available at: https://www.smh.com.au/business/markets/australian-dollar-jumps-on-back-of-us-inflation-data-20180215-p4z0do.html [Accessed 14 May 2018].
Tradingeconomics.com. (2018). Australia Interest Rate | 1990-2018 | Data | Chart | Calendar | Forecast. [online] Available at: https://tradingeconomics.com/australia/interest-rate [Accessed 14 May 2018].
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