Australia Interst Rate

http://www.bloomberg.com/apps/news?pid=20601080&sid=aJlTmyIGLPBc





Summary

In October, Australia has become the first G20 Nations who increased interest rate by 0.25 percent. Australian central bank governor Glenn Stevens is expected to add extra quarter percent of interest rate in November, said by analysts. According to Statistic issued in October, the unemployment rate of Australia has reduced for the first time this year to 5.7% signalling a recovery from economic recession. In addition, the Australian currency reaches its 14 month high which indicates investors' optimistic forecast of Australia's future. In 2009, Australia has out-performed most of the G20 nations by gaining 1% of expansion as world's demand for natural resources continue increase in the past year. Strong stastics are the significant evidence of Australian’s recovery.

Connection

The adjustment of interest rate is a perfect example of supply and demand law. As the central bank raises the interest rate, there will be a greater demand for Australian dollars because potential investors are expecting a better future for Australia. In addition, Australia is more of an import than an exports country. An increase in interest rate costs Australia more in exports, but benefit Australian imports by raising the purchasing power of Australian dollars. However, because of an increase in interest rate, credit acquisition for Australian businesses will be harder because of the greater interest expense; as a result, there is less demand for extra credit.

Reflection

Australian central banks decided to raise the interest rate in order to slow the economic activities. In my opinions, the Australian central banks had made the right choice of raising interest rate because excessive lending will result a “w” recovery path for their economy. A low interest rate stimulates people’s demand for extra credit. If line of credit is not constrained, people will start lending more than they can pay off. Once the cycle is started, people will lend more to pay of f their previous loan. The fear of losing will cause a panic in the market and another wave of credit collapse will devastate the country. Should Australian central raise its interest rate more given the fact that it is still comparably low to the regular standard?