Tuesday, August 6, 2013

Australia cuts rate by 25 bps, to adjust policy as needed

    Australia's central bank cut its cash rate by a further 25 basis points to 2.50 percent, as widely expected, and said it "will continue to assess the outlook and adjust policy as needed to foster sustainable growth in demand and inflation outcomes consistent with the inflation target over time."
    In recent months, the Reserve Bank of Australia (RBA) had said it had scope to adjust policy if required to support demand, but that statement was omitted today, signaling that it has now shifted to a more neutral policy stance.
    The RBA, which has cut rates by 50 basis points this year and by 225 points since October 2011, said the Australian dollar remains at a high level although it has depreciated by around 15 percent since early April.
    "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 RBA said, repeating last month's statement and acknowledging the benefits of a lower exchange rate on the international competitiveness of its exports.
    The Australian dollar rose in response to the RBA's outlook, to 0.898 cents to the U.S. dollar from 0.892 prior to the news. The A$ had been above parity to the U.S. dollar most of the time since early 2011 but then started to weaken in early May in response to the RBA's first rate cut this year.
    Compared with the start of the year, it is down 13.5 percent against the U.S. dollar when it was trading around 1.038 to the US$.

    RBA Governor Glenn Stevens said Australia's economy had been growing a bit below its trend over the past year and this "is expected to continue in the near term as the economy adjusts to lower levels of mining investment."
    Unemployment has risen and inflation is consistent with the bank's target. With growth in labour costs moderating, Stevens said inflation should continue in line with the bank's target of 2-3 percent over the next one to two years, "even with the effects of the recent depreciation of the exchange rate."
    Australia's unemployment rate rose to 5.7 percent in June, continuing its climb this year and the highest rate since late 2009.
    In the second quarter of this year, the inflation rate eased to 2.4 percent from 2.5 percent in the first quarter, while the country's Gross Domestic Product expanded by 0.6 percent in the first quarter from the previous quarter for annual growth of 2.5 percent, down from 3.1 percent in the previous two quarters.
   Easier monetary policy over the past 18 months has supported interest-sensitive spending and asset values and further effects can be expected over time, Stevens said, adding that the pace of borrowing had been relatively subdued but there were signs of increased finance demand by households.
    Looking abroad, Stevens said global growth is a bit below average this year but there were reasonable prospects of a pick-up next year.
    Financial conditions remain very accommodative, though he admitted that sovereign bond yields has risen "noticeably" from exceptionally low levels following the reassessment of the outlook for U.S. monetary policy. This had led to higher volatility in financial markets, particularly affecting a number of emerging economies, he added.



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