Monday, December 2, 2013

Australia holds rate, repeats A$ "uncomfortably high"

    Australia's central bank held its benchmark cash rate steady at 2.50 percent, as expected, and repeated that the Australian dollar remains "uncomfortable high" and a "lower level of the exchange rate is likely to be needed to achieve balanced growth in the economy."
    The Reserve Bank of Australia (RBA), which has cut its cash rate 50 basis points this year and by 225 points since embarking on its easing cycle in November 2011, also repeated last month's view that sentiment in households and businesses had improved "but it is still unclear how persistent this will be" and public spending was forecast to be quite weak.
    The impact of the RBA's rate cuts since late 2011 have supported spending on interest-sensitive items and asset values, but "the full effects of these decisions are still coming through, and will be for a while yet," the RBA said.
    Australia's economy has been hit by lower investment in the huge mining industry from reduced demand from China and the central bank said economic growth and high unemployment is likely to persist in the near term as the economy adjusts to these lower levels of mining investment.

    Last month the RBA reduced its 2014 growth estimate to between 2 percent and 3 percent from its August forecast of 2.5 to 3.5 percent. The growth estimate for 2013 was trimmed in August to 2.25 percent from an earlier 2.50 percent. In 2012 the economy grew by 3.7 percent.
    In the second quarter, Australia's Gross Domestic Product expanded by 0.6 percent from the first for annual growth of 2.6 percent, up from 2.5 percent in the first but down from 3.1 percent in the fourth.
    The central bank has been openly expressing its wish for a lower Australian dollar - known as the Aussie - for months and in November the RBA sharpened its language and described the currency's level as "uncomfortably high" whereas it had previously just said the Aussie was "high."
    After trading above parity to the U.S dollar most of the time since early 2011 and then through the first four months of the year, the Aussie weakened in early May in response to the RBA's first rate cut.
    But it then rebounded in September and October in light of improving economic data. But it resumed its decline in early November and was trading around $0.90 today, down 13.5 percent from the beginning of the year.
    Two weeks ago Glenn Stevens, RBA governor, said he was "open-minded" on whether to intervene in foreign exchange markets and push down the Aussie. But a few days later, the RBA's deputy governor dampened speculation that the reserve bank was ready to intervene, saying the threshold for intervening was "fairly high." The last time the RBA intervened in currency markets was in late 2008 following the collapse of Lehman Brothers.
    Australia's inflation rate eased to 2.2 percent in the third quarter from 2.4 percent and the RBA said this was consistent with its medium-term target and it expects this to remain the case over the next one to two years. The RBA targets 2-3 percent inflation.


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