Home Central Banks RBA Rates and the Australian Miracle

RBA Rates and the Australian Miracle

Stockholm (Ekonamik) – The Reserve Bank of Australia decided to hold its target policy rate at 1.5% at its April meeting according to a statement from the central bank.

“The low level of interest rates is continuing to support the Australian economy,” said RBA Governor Philip Lowe in the RBA’s monetary policy statement. “Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual. Taking account of the available information, the Board judged that it was appropriate to hold the stance of policy unchanged at this meeting. The Board will continue to monitor developments and set monetary policy to support sustainable growth in the economy and achieve the inflation target over time.”

This is the 33rd consecutive month with rates at this level, the longest period the Australian central bank has gone without increasing its target rate. In December 2018, the Australian economy celebrated the 108th consecutive quarter of positive real GDP growth, an achievement without any foreseeable end. The last time the economy contracted was in December 1991, a record among developed economies. Inflation expectations of 1.5% for the next quarter were also in line with RBA’s target of 2%-3%.

Source: RBA and Ekonamik interpolations
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The economic performance of Australia is motivated by the disproportionate share of its economy dedicated to the extraction of natural resources and its proximity to China. According to the Observatory of Economic Complexity, Australia is the 59th most complex economy in 2017 according to its Economic Complexity Index (ECI) – as a comparison, Sweden is the 5th most complex economy, Germany is the 3rd, the USA ranks 7th, Norway 22nd and Portugal 48th. The configuration of Australia’s exports illustrates its lack of complexity:

Source: OEC – What does Australia Export?


As important as what it exports is where it exports these products. In 2017Australian exports are even more concentrated by destination then they are by industry. China accounts for over a third of all Australian exports. Asia as a whole represents 84% of Australia’s exports.

Source: OEC – Where does Australia Export?

In comparison, China was only responsible for 5.6% of Australia’s exports in 2000. Japan was Australia’s main Asian trading partner accounting for 19% and Asia as a whole accounted for 56%. In 1990 the shares were similar. Asia accounted for 58% of all exports and China, still in the early stages of its growth accounted for a mere 3.8% of Australian exports.

Countries are often hostages to their geography. This can go both ways. There’s little other than Tourism that the Federated Republic of Micronesia can do. A country poor in natural resources or plagued by extreme weather events, such as Bangladesh, can often struggle to cover the development gap. Meanwhile, countries rich in natural resources need to have good institutions to avoid instances of cleptocracy or inefficient uses of resources for misguided geopolitical ambitions – the DRC and Russia come to mind. But some times a country has good institutions, is blessed with natural resources and lives near to an economic behemoth. Norway is a case in point. Australia is another.

Australia’s growth is a great case study of the power of the gravity model of trade, which states that neighbouring countries will tend to trade more, all things being equal. As long as China does well, the Australia economy should continue to ride this wave of Asian development. Given China’s obfuscation of its own statistics, an interesting side-effect of Australia’s reliance on China is that all things being equal, Australian exports to China might be a good indicator of Chinese economic performance. After all, all those inputs have to go somewhere.

Picture from Pixabay

Filipe Wallin Albuquerque
Filipe Wallin Albuquerque
Filipe is an economist with 8 years of experience in macroeconomic and financial analysis for the Economist Intelligence Unit, the UN World Institute for Development Economic Research, the Stockholm School of Economics and the School of Oriental and African Studies. Filipe holds a MSc in European Political Economy from the LSE and a MSc in Economics from the University of London, where he currently is a PhD candidate.

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