Behind the closed doors of the Reserve Bank’s boardroom, the 9 board members will meet for around 3 and a half hours to discuss the state of the global, national and state economies to make a decision on the “Cash Rate”.
This month, the board is largely expected to hold the cash rate at 1.5%, as based on the minutes of the previous month’s meeting, the global economy is starting to pickup it’s pace and enter a growth phase, whilst Australia is sluggish in it’s growth.
The key (local) factors that will influence the board’s decision are:
1. Consumer Price Index (CPI / Inflation)
CPI has been on an overall downward trend since 2011, which indicates the national economy is slowing overall. The target rate for CPI is between 2% and 3%, and currently CPI sits at 1.9%. Cutting the cash-rate would stimulate the economy, which would in-turn increase CPI.
2. Gross Domestic Product (GDP) Growth Rate
Probably one of the most talked-about indicators of economic health, the GDP Growth Rate indicates the quarterly change in the total value of goods and services produced within Australia. Whilst the RBA does not have a target for GDP growth, it is generally recognised that negative growth would be bad for the economy, so a value greater than 0% would be desirable. Cutting the cash-rate would stimulate the economy, and therefore increase GDP growth.
3. Unemployment / Labour Force
A key driver of economic growth is the unemployment rate, measured as the % of work-aged individuals currently looking for employment or working less than 1 hour per week.
5% unemployment is widely recognised as “full employment” for Australia, and this forms the target unemployment rate. If unemployment falls below 5%, the economy begins to “overcook” and CPI rises, whilst unemployment above 5% can lead to a sluggish economy, slowing GDP growth.
Currently unemployment is at 5.6% nationally, however this varies significantly from state to state.