Major Determinants of Interest Rates

Inflation is when there in an increase in price of goods and service, causing there to be a fall in the currency as lesser goods and services can be brought by each unit of currency due to the rise in price. Rapid economic growth will often lead to inflation. When the economy is rapidly growing, a company will need to employ more employees, resulting to a fall in unemployment rate. As unemployment rate falls, lesser people will be looking for jobs and the company will find it harder to fill up job vacancies. This will cause the salaries of the workers as well as company spending to increase, resulting in the company passing on the extra costs to the consumer. Together with the raise in salaries for the employees, they will have more to spend, resulting in an increase in an aggregate demand. All this will result in rapid economic growth, where the increase in price will cause inflation to occur.

Determining the cash rate by the Reserve Bank of Australia establishes a number of different factors for the Australian economy. The RBA is responsible for controlling monetary policy and ensuring that Australia’s financial system is stable. In light of recent events that have impacted economic growth, the RBA has maintained a 2.0% cash rate, which affects the overnight rate for loans to commercial banks. Previously held at 2.25%, a decrease by 25 basis points brought down the cash rate to 2.0%, an all time low in the past decade. The RBA held an expansionary stance to promote investment and spending in the local economy in order to drive growth. It is recommended that the RBA maintain the current cash rate of 2.0% in light of consumer confidence

The inflation rate is constantly changing every day. The entire investment community is always on the look out for what the future inflation rate may be. It has been proven that a healthy economy preforms best when inflation rate is

The demand for Australia's currency in the foreign exchange market (Forex) is a derived demand. It is derived from the demand for a country's exports of goods and services and its assets.

Inflation is a general increase in the prices of all goods and services. Inflation occurs when the average level of prices in the economy increases over time. Even as overall prices are increasing, particular relative prices will change. The US Federal Reserve attempts to control and reduce inflation. Central banks focus is on strictly controlling inflation, protecting financial assets, and keeping labor markets strictly in check. Central Banks hold inflation more important than unemployment. Central Banks believe the only long-run impact of monetary policy is on the rate of inflation. They believe free-market forces in the real economy determine real output, employment, and productivity. To attain the targeted inflation rate, central banks influence credit creation and hence spending by frequently adjusting interest rates.

The Federal reserve needs to increase interest rates in the next year in order to reduce inflation. With low unemployment, the government is placing strain on the economy by lowering taxes and increasing spending. When the economy reaches its maximum output, prices increase while output remains the same. This could be what is happening now, with economic overheating on the horizon. However, the Federal Reserve could stifle this inflation by hiking interest rates over the next year. This would decrease the money supply and thus reduce inflation to its targeted level. It would also provide some leverage for the Fed to lower rates in the case of a recession.

The spread of globalisation especially since 1990 has introduced many new elements into the financial markets and what determines the value of a nation 's exchange rate. This does not just apply to Australia, but as we saw in the later half of the 1990 's, to many other nations in the world. Firstly, trade in goods and services makes up a much smaller proportion of the demand and supply for currency. In the world economy, payments for international trade only account for about 1% of foreign exchange transactions. The total foreign exchange requirements for exporting and importing of goods and services in Australia is less than 3% of the total use of the foreign exchange turnover in Australian dollars (Reserve Bank Bulletin, Table F7 and Australian National Accounts, 5206.0). The main purpose for foreign exchange trading is international financial transfers of

Janet Yellen states, “the possibility that low long-term interest rates are a signal that the economy's long-run growth prospects are dim….depressed long-term growth prospects put sustained downward pressure on interest rates. To the extent that low long-term interest rates tell us that the outlook for economic growth is poor, all of us should be very concerned, for--as we all know--economic growth lies at the heart of our nation's, and the world's, future prosperity.” A high interest rate is usually set when an economy is already well off. An example of an economy that's well off is with the result of inflation. But if inflation is left unchecked it will lead to a loss of purchasing power meaning that your dollar is worth less than what it was before. This is where high interest rates become a great convenience to the economy. Though this may sound proficient, ultimately a high interest rate that lasts lead to struggles within the economy. Borrowing will become more difficult due to rates being to high which will also cause less productivity to

As the inflation rate rises, I will have to redistribute my income. I would have to be stricter with my spending habits compared to an economy that has a low inflation rate. As the prices of everything around me starts to go up, I will have to be able to adjust my spending habits to make sure that my necessities are taking care of and that I am still able to spend more. By the inflation rates going up, this can have a negative impact on some manufacturers. As inflation goes up, I will not be the only person in the economy cutting back on unnecessary spending and be stricter with my money. A perfect example is when the price of gas took a significant increase during the mid-2000s. Car manufactures started to see that people were spending less on purchasing cars. Another reason why I will have to stricter with my money after a significant increase in inflation rates is the idea that I may be impacted by a pay cut or completely laid off.

In economics, with the inflation is a rise in the actual general level of prices of goods and services in an economy from over a period of time. When the general price level rise, such as each of the units currency buys fewer goods and services. Consequently, inflation reflects a reduction in the purchasing power4 per unit of money. This therefore means that with the loss of real value in the medium of exchange and unit of account within the given and actual economy. With a chief measure for example and the price of inflation is within the given inflation rate, the annualised percentage change within a general price index over time in which is normally the consumer price index.

Inflation hinders economic growth. For example, when inflation is high, goods and services cost more, and people tend to spend less. High inflation also causes less long-term planning associated with spending money, such as home building and investing. Businesses are affected in the same manner. When inflation goes up, and down inconsistently, people become weary of spending, exacerbating their fears that they won’t be able to pay their bills. Long-term interests also go up, due to high inflation. The cost added to long-term interest rates compensates for the risk associated with inflation. Additional costs on interest rates make people less willing to take on a loan. When, the demand for goods and services is low, then the supply of goods up, the production of those goods has to decrease, giving rise to

Inflation occurs when the general price level of goods and services have increased in a period of time. It is a measurement that signals the current economic situations and whether there is a potential economic growth.

The Exchange rate is the amount one country will buy another country’s currency. The conversion of currency is not 1 dollar for 1 dollar. The exchange rate between Australia and America is $0.7676 for 1 Australian dollar. Exchange rates can change from day to day. Back in 2011 the exchange rate between Australia and the USA was 1 Australian dollar would buy 1.015 US dollars. It was almost 1 for 1.

As of 1/19/2015, the exchange rate is one Australian Dollar per 0.69 US Dollar. Exchange rates fluctuate frequently, and are determined by a vast number of economic factors. The International System of Units is the system of weights and measurements for Australia. This system of measurement uses the metric system which is the world’s most widely used measurement system.

Inflation Rate: The rate which the general level of prices for goods and services are rising purchasing power is falling. This creates uncertainty because it how it fluctuates widely from month to month or year to year.