Monday, February 3, 2014

Australia holds rate and sees period of stable rates

   Australia's central bank held its benchmark cash rate steady at 2.50 percent, as expected, and expects to maintain the rate at the current level for a while.
    "In the board's judgement, monetary policy is appropriately configured to foster sustainable growth in demand and inflation outcomes consistent with the target," the Reserve Bank of Australia (RBA) said in a statement quoting its governor, Glenn Stevens.
    "On present indications, the most prudent course is likely to be a period of stability in interest rates," he added, omitting his reference in recent months to the Australian dollar being "uncomfortably high."
    The RBA has been easing its policy stance since November 2011 - cutting rates by a total of 2.25 percentage points including 50 points in 2013 - and Stevens said the country's economy was expected to grow below its trend for some time and unemployment was likely to rise further before peaking.
    But looking further ahead, Stevens said economic growth was expected to strengthen, helped by low interest rates and the decline in the exchange rate of the Australian dollar.
    Inflation is expected to be somewhat higher than forecast three months ago, but still consistent with the target of 2-3 percent over the next two years, Stevens said.
    The RBA will be releasing its latest economic forecast on Friday and is widely expected to revise upwards its inflation forecast following news that headline inflation jumped to 2.7 percent in December from 2.2 percent and underlying inflation to 2.6 percent, above the bank's expectations.
    The RBA has been trying to talk down the value of the Australian dollar - known as the Aussie - for months in order to help its export industry and Steven even raised the possibility that the central bank could intervene in currency markets in November by saying he was "open-minded" on whether to intervene. The RBA rarely intervenes in foreign exchange markets, with the last time in late 2008.
    In its December policy statement, the RBA described the Aussie as being "uncomfortably high"and said a "lower level of the exchange rate is likely to be needed to achieve a balanced growth in the economy."
    The RBA has now toned down this language, saying that "the exchange rate has declined further, which, if sustained, will assist in achieving balanced growth in the economy."
    One of the reasons for the RBA's more relaxed view of the Aussie is not only that it fallen since early May 2013, but that inflation might be starting to rise due to the impact of higher import prices.
    Commenting on the higher-than-expected inflation rate in December, the RBA said this "may be explained in part by faster than anticipated pass-through of the lower exchange rate," though it added that domestic prices had also risen at a solid pace despite slower growth in labour costs.
    The Aussie weakened sharply from early May through August last year - a response to the RBA's rate cut - before bouncing back through October. But since October the Aussie has been depreciating, partly in response to the slowdown in the Chinese economy, and is down 1.7 percent this year, trading at 1.14 to the U.S. dollar today.
    Australia's economy, which was hit by lower mining investments, is starting to react to the central bank's accommodative policy and the RBA said recent information suggest slightly firmer consumer demand and signs that housing construction is expanding solidly.
    However, with investment spending in the natural resource sector declining significantly the near-term prospects for business investment remain subdued and the demand for labour has remained weak.
    Australia's unemployment rate was steady at 5.8 percent in December and November while the country's Gross Domestic Product grew by only 0.6 percent in the third quarter from the second quarter, for annual growth of 2.3 percent, down from 2.6 percent.
    Looking abroad, the RBA said the global economy is showing a reasonable prospect of improving from 2013, noting that the U.S. economy is continuing to expand, the euro area has started to recover from recession, Japan has recorded a significant pick-up in growth, while China's growth remains in line with policymakers' objectives.
    The RBA acknowledged that global financial conditions remain very accommodative, despite the U.S. Federal Reserve's start of curtailing its stimulus and "equity and credit markets remain able to provide adequate funding, but for some emerging market countries conditions are considerably more challenging that they were a year ago."


Post a Comment