Monday, September 30, 2013

Australia holds rate, says lower A$ would assist growth

    Australia's central bank held its benchmark cash rate steady at 2.5 percent, as expected, saying this was appropriate and the full effects of rate cuts since late 2011 "are still coming through, and will be for a while yet."
    The Reserve Bank of Australia (RBA), which has cut its cash rates by 2.25 percentage points since November 2011, including cuts of 50 points this year, said the pace of borrowing remains subdued though there have been recent signs of increased demand for finance by households and evidence of a shift in savers' behavior in response to the declining returns on low-risk assets.
    While the RBA repeated that it would "continue to assess the outlook and adjust policy as needed," the bank softened its description of the Australian dollar, saying that it is still about 10 percent below its level in April despite a recent rise.
    "A lower level of the currency than seen at present would assist in rebalancing growth in the economy," the RBA said, no longer describing the exchange rate of the A$ as high, as it has in recent months.
    From January through April, the A$ traded above parity to the U.S. dollar but it started to weaken in early May in response to the RBA's first rate cut and fell to a year-low of 89 cents to the U.S. dollar on Sept. 1. Since then it has rebounded, trading at 93 cents to the U.S. dollar today.
    Australia's economy has been hit by lower demand for its raw materials by China and the RBA has been cutting rates to help the economy adjust to lower levels of mining investment.
    The RBA said the economy had been growing a bit below trend in the past year and this was expected to continue. It acknowledged that the unemployment rate had edged higher but there had also been an improvement in household and business sentiment though it was too soon to judge whether this would continue to improve.
    Inflation remains consistent with the RBA's 2-3 percent target and the central bank expects this to continue over the next one to two years even with the impact of a lower exchange rate as labour costs are moderating.
    In the second quarter, Australia's headline inflation rate eased to 2.4 percent, down from 2.5 percent in the first quarter, but up from 2.2 percent in the fourth quarter of 2012.
   Australia's Gross Domestic Product expanded by 0.6 percent in the second quarter from the first for annual growth of 2.6 percent, up from 2.5 percent in the first.


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