Economic Essay Example | Topics and Well Written Essays - 1500 words - 2

Economic - Essay Example For the purpose of maintaining and achieving such stability, however, it uses various tools and strategies which are discussed in the article as well as explained elaborately in the subsequent sections of this paper. Introduction: This article titled â€Å"RBA raises inflation forecast as traders raise rate expectations† written by Michael Boutros, appeared in The Bull, on May 09, 2011 (thebull, 2011). The author is a technical / fundamental currency analyst specializing in the FX markets, and works for DailyFX (fxstreet, 2011). The article discusses the current Australian interest rates stating the RBA's (Reserve Bank of Australia) recent declaration regarding rise in the inflation forecast above the 2-3 per cent target through the year 2013. The Reserve Bank of Australia held rates at 4.75% for a fifth straight meeting. It states that considering the current rates, which are above the expected target, the central bank has very little opportunity to tolerate any further advan ces in its prices. The author predicts that in response to such rising inflation, the RBA might lift its cash rate in the coming months, as the investments in mining and energy sectors rise, which are likely to further accelerate the pace of inflation. Economic concepts and theories to be applied: The article deals with the variation in interest rates and the rising inflation, and discusses the ways and means to control the same. In this regard, the author has suggested tightening the monetary policy, which can be discussed in accordance with the contractionary monetary policy preceded by a brief overview of the monetary policy i.e. both the concept as well as the monetary policy of Australia. The other concepts discussed in this article include Cash Rate, and inflation targeting. Key Definitions: Inflation targeting: According to Bernanke et al., (1999: 4) inflation targeting is a framework for monetary policy characterized by the public announcement of official quantitative target s (or target ranges) for the inflation rate over one or more time horizons, and by explicit acknowledgement that low, stable inflation is monetary policy's primary long-run goal" (in Hufner, 2004: 7) Analysis: Economists often forecast a rise in inflation rates. These forecasts or predictions regarding inflation are based on various factors. One such approach is the standard economic theory which posits that a rise in inflation occurs on account of a downturn in the economy and when the production surpasses the capacity constraints. According to this approach, the measures of an economic downturn, such as capacity utilization or unemployment rates, offer valuable information regarding the manner in which inflation would turn, i.e. rise or fall. However, this is not the only approach to forecasting inflation. The other approach relies on certain key indicators of inflation. These key indicators take into consideration factors such as commodity prices, gold prices, and other composite indicators which are then used to forecast the inflation rates. According to the article, the RBA forecasts inflation to reach 3 per cent by December this year, while the forecast for the year 2013 is estimated to cross 3.25 per cent mark. The following figure indicates the inflation rate