Cut to the chase - RBA rate cut econo-speak decoded

As the Reserve Bank of Australia (RBA) makes yet another cut to the official cash rate, Aussies are bracing themselves for a further blizzard of financial and economic jargon in the news, as phrases like ‘macroprudential measures’ and ‘quantitative easing’ are tossed around like confetti at a wedding.

rba rate cuts decoded
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To help you understand what’s really going on, we’ve unscrambled 10 of the terms that you may have been hearing.

1. Macroeconomic policy

This is probably a good place to start. Macroeconomic policy is a phrase you may have heard this week from experts talking about how the RBA’s cash rate cut fits into the wider picture of how Australia’s economy is managed. 

Macroeconomic policy is essentially that – overall, high level management of the economy. It contains three pillars: monetary policy, fiscal policy (more on these two below), and exchange rate policy, which helps determine how the Aussie dollar compares to other global currencies.The Australian Parliament sums up the aim of macroeconomic policy as providing a stable economy that encourages growth. 

2. Monetary policy

This one is at the heart of the recent rate cuts. ‘Monetary policy’ is a fancy way of describing decisions that relate to money, and the RBA, our central bank, is largely responsible here. 

Generally speaking, the RBA’s aim is to control the level of inflation, which is a measure of how valuable our money is relative to the things we buy, or in other words, by how much prices are going up or down. 

Setting the cash rate (the short-term interest rate at which banks lend to one another) is one of the ways the RBA can help influence our economy and can have a big impact on the interest rates banks charge consumers on loans and offer them on deposits

3. Target range for inflation

This is what the RBA believes to be the appropriate rate of inflation or price growth in Australia. The RBA’s current target is an inflation rate of 2-3% on average over time. Its monetary policy (see above) is used to help ensure that inflation falls within this range. Too much or too little inflation can affect consumer confidence and behaviour and is generally seen as being bad for the economy. 

The current inflation rate is below the target at 1.3%, which is part of the reason the RBA has been more active than usual in moving the cash rate of late. The RBA hopes that cutting the cash rate will ultimately lead to increased inflation and consumer spending, which would help boost the economy as a whole.

4. Underemployment/underutilisation/spare capacity

The RBA has also referenced the rate of underemployment as a justification for its recent flurry of cash rate cuts. Along with unemployment, underemployment (sometimes referred to as ‘underutilisation’) is used to measure ‘spare capacity’ in the labour market. 

According to the Australian government, whereas unemployed people are those without work, underemployed people are employed but not to the desired capacity, perhaps working fewer hours than they would like or doing work below their skill level because they can’t find a job in their chosen industry. 

5. Fiscal policy

Let’s get fiscal. This policy is controlled by the Australian government, as outlined in the treasurer’s annual budget. Fiscal policy boils down to three main aspects: government spending on things like roads and schools, the taxes individuals and businesses pay to fund the spending (see the tax cuts passed recently) and any government borrowing used to supplement tax income. 

6. Macroprudential measures

This one sounds particularly complex – at least these words are close to one another in the dictionary. Or if we go by the RBA’s explanation, this term essentially means sensible policies or prudent monetary or fiscal measures that are designed to manage risk and ensure stability for the wider economy.

7. Structural reforms

This refers to measures that are designed to boost an economy through making changes to its fundamental structure. It can involve proactively addressing issues which may prevent future economic growth, like changes to make workers more adaptable in anticipation of increased automation.

8. GDP

GDP is short for Gross Domestic Product and, according to the Australian government, refers to the total value of all goods and services that are produced within the country over a period of time. The percentage change in the GDP is the measure for economic growth and it may be positive (a growing economy) or negative (a shrinking economy). 

9. Per capita recession

A recession refers to a decrease in economic growth (measured using GDP) for a period of two or more financial quarters in a row. According to the Australian Financial Review, measuring growth ‘per capita’ excludes the effect of population growth on the economy, which can boost growth in the short term but mask underlying weaknesses in the economy.

People sometimes refer to Australia’s almost 30-year record of not having experienced a recession, but this refers to growth in the economy overall (nominal growth). When the increasing population is factored in (per capita growth), the record is less impressive.

10. Quantitative Easing

Quantitative easing is an unconventional monetary policy option that was used in some parts of the world, such as the US, the UK and other parts of Europe, to stimulate those economies during the Global Financial Crisis. Also known as ‘money printing’, quantitative easing in Australia would involve the RBA buying assets – often government bonds – to inject money into the financial system and help facilitate lower borrowing costs, more lending and increased investment.

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