Tuesday, July 2, 2013

Australia holds rate, sees "some scope" for cut if needed

    Australia's central bank held its cash rate steady at 2.75 percent but said the outlook for inflation "may provide some scope for further easing, should that be required to support demand."
    The rate guidance by The Reserve Bank of Australia (RBA) compares with its statement from June when it saw "scope for further easing," indicating that it now sees slightly less room to cut rates as it added the word "some."
    The RBA, which has cut its policy rate by 25 basis points this year and by a total of 200 points since October 2011, noted that the Australian dollar had depreciated by around 10 percent since early April, but added that it remains "at a high level" and it is "possible that the exchange rate will depreciate further over time, which would help to foster a rebalancing of growth in the economy."
    The Australian dollar rose above parity to the U.S. dollar at the start of 2011 and remained there most of the time until the RBA's rate cut in early May when it started dropping. Since the start of this year the Australian dollar has depreciated by some 11 percent to the U.S. dollar, trading at 0.92 today.
    The RBA said the easier financial conditions that are now in place "will contribute to a strengthening of growth over time," with signs of increased demand for finance by households though the pace of borrowing had remained relatively subdued.
    Economic growth in Australia has been below trend and the RBA expects this to continue in the near term as the economy adjusts to lower levels of mining investment.
    Australia's Gross Domestic Product rose by 0.6 percent in the first quarter from the previous quarter, for a 2.5 percent annual rise, down from 3.1 percent in the fourth quarter.
    The inflation rate rose slightly to 2.5 percent in the first quarter from 2.2 percent in the previous quarter but the RBA said it was still consistent with its 2-3 percent target "an is expected to remain so over the next one to two years, notwithstanding the effects of the recent depreciation of the exchange rate."
    The RBA added that financial conditions remain very accommodative globally but the "reassessment by the market of the outlook for monetary policy in the United States has seen a noticeable rise in sovereign bond yields from exceptionally low levels."



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