Rate cut a must for ‘flat-lining’ economy

Today’s interest rate cut to a record low has been welcomed by Griffith University Professor of Economics, Tony Makin, who described it as a necessary move.

“An interest cut is necessary as the non-mining economy is flat-lining in large part due to the strong dollar,” Professor Makin said.

The Reserve Bank of Australia cut the official interest rate by 25 basis points to 3%, the lowest it has been since April 2009.

“Australia’s interest rates are still high by international standards and a lowering will help reduce the exchange rate without inflationary consequences,” Professor Makin said.

The Gold Coast-based Professor of Economics has urged government not to be passive in addressing a soaring exchange rate that is affecting competitiveness and profitability in the manufacturing and tourism sectors.

He has developed an economic theory that establishes definitively that Australia’s exchange rate moves in step with commodity prices.

The blueprint invites government to be proactive in its management of the economy, and end the laissez-faire approach to the exchange rate.

“Australia’s manufacturing sector is struggling, as are the tourism and higher education industries. They always cite the exchange rate at the top of their list of grievances affecting profitability and competitiveness,” Professor Makin said.

“Governments don’t have to be passive. Our governments can intervene. They have the capacity to manipulate their budgets through fiscal policy, and actually respond to this situation.”

In a paper to be published by the Journal of Asian Economics, Professor Makin puts forward a new theoretical framework which analyses the impact of commodity price fluctuations on small open macroeconomies, with particular reference to Australia and New Zealand, major commodity exporters in the Asian region.