Monday, December 1, 2014

Australia holds rate, still sees period of stable rates

    Australia's central bank left its benchmark cash rate at 2.50 percent, as expected by most economists, and confirmed its recent guidance that "on present indications, the most prudent course is likely to be a period of stability in interest rates."
    The Reserve Bank of Australia (RBA), which has kept its rate steady since August 2013, also maintained its view from last month that economic growth is moderate due to the significant decline in investment in the resource sector while other areas of demand are expanding.
    But overall, the RBA still expects Australia's economy to grow a "little below trend for the next several quarters."
    The RBA also repeated its view that the Australian dollar, known as the aussie, remains above its fundamental value but added that a "lower exchange rate is likely to be needed to achieve a balanced growth in the economy," a change to its statements in recent months when it said that the current level was offering less assistance i achieving balanced growth.
    After trading above parity to the U.S. dollar in 2011 and 2012 - and hitting a high of almost 1.10 to the dollar in July 2011 - the aussie's trend changed in April 2013 when the RBA cut its rate. Since then it has been depreciating steadily, hitting 0.846 to the U.S. dollar today, down 5 percent this year.
    Comments by RBA Deputy Governor Philip Lowe last week about the benefits of a weaker aussie for the country's economy were seen by some observers as a sign the RBA could cut rates today. But most economists expected the RBA to maintain its rates today.

    Australia's headline inflation rate eased to 2.3 percent in the third quarter from 3.0 percent in the previous quarter.
    The country's Gross Domestic Product expanded by 0.5 percent in second quarter from the first quarter for annual growth of 3.1 percent, down from 3.5 percent in the first quarter but up from 2.7 in the fourth quarter of 2013 and 2.3 percent in the third quarter of 2013.

    The Reserve Bank of Australia issued the following statement by its governor, Glenn Stevens:

"At its meeting today, the Board decided to leave the cash rate unchanged at 2.5 per cent. 
Growth in the global economy is continuing at a moderate pace. China's growth has generally been in line with policymakers' objectives. While weakening property markets present a challenge in the near term, economic policies have been responding in a way that should support growth. The US economy continues to strengthen, but the euro area and Japan have both seen weakness recently. Some key commodity prices have declined significantly in recent months, reflecting somewhat softer demand and, more importantly, increased supply. 
Global financial conditions remain very accommodative and long-term interest rates and risk spreads remain very low. Differences in monetary policies across the large jurisdictions are affecting markets, particularly exchange rates. 
In Australia, most data are consistent with moderate growth in the economy. Resources sector investment spending is starting to decline significantly, while some other areas of private demand are seeing expansion, at varying rates. Public spending is scheduled to be subdued. Overall, the Bank still expects growth to be a little below trend for the next several quarters. 
Inflation is running between 2 and 3 per cent, as expected, with recent data confirming subdued rises in labour costs. Although some forward indicators of employment have been firming this year, the unemployment rate has edged higher. The labour market has a degree of spare capacity and it will probably be some time yet before unemployment declines consistently. Hence, growth in wages is expected to remain relatively modest over the period ahead, which should keep inflation consistent with the target even with lower levels of the exchange rate. 
Monetary policy remains accommodative. Interest rates are very low and have continued to edge lower over the past year or so as competition to lend has increased. Investors continue to look for higher returns in response to low rates on safe instruments. Credit growth is moderate overall, but with a further pick-up in recent months in lending to investors in housing assets. Dwelling prices have continued to rise. 
The exchange rate has traded at lower levels recently, in large part reflecting the strengthening US dollar. But the Australian dollar remains above most estimates of its fundamental value, particularly given the significant declines in key commodity prices in recent months. A lower exchange rate is likely to be needed to achieve balanced growth in the economy. 
Looking ahead, continued accommodative monetary policy should provide support to demand and help growth to strengthen over time. Inflation is expected to be consistent with the 2–3 per cent target over the next two years. 
In the Board's judgement, monetary policy is appropriately configured to foster sustainable growth in demand and inflation outcomes consistent with the target. On present indications, the most prudent course is likely to be a period of stability in interest rates."


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