Tuesday, August 4, 2015

Australia holds rate, omits need for A$ to ease further

     Australia's central bank left its benchmark cash rate steady at 2.0 percent, as expected, and repeated its guidance from last month that its policy stance would be determined by "further information on economic conditions and financial conditions to be received over the period ahead."
     But the Reserve Bank of Australia (RBA), which has cut its rate twice this year by a total of 50 basis points, added that the Australian dollar, known as the aussie, "is adjusting to the significant declines in key commodity prices," omitting its frequent statement that "further depreciation seems both likely and necessary," signaling that it is more comfortable with the current exchange rate.
    The aussie has been depreciating since September 2014 and fallen to levels not seen since April 2009. In response to the RBA's statement, the aussie firmed to 1.36 to the U.S. dollar from 1.37, for a drop of 10.3 percent since the start of the year and a fall of 17.6 percent since the start of 2014.
    In his statement, RBA Governor Glenn Stevens repeated that Australia's economy was continuing to growth at a pace that its "somewhat below long-term averages," but added today that this was associated with "somewhat stronger growth of employment" compared with July's statement that unemployment had been "little changed."
    In June Australia's unemployment rate rose to 6.0 percent from 5.9 percent in May but was still down from the recent peak of 6.3 percent in October 2014.
   However, as in recent statements, Stevens added that country's economy would be operating with spare capacity for some time and inflation was forecast to remain consistent with the RBA's target over the next one to two years, even with a lower exchange rate.
    Australia's headline inflation rate rose slightly to 1.5 percent in the second quarter form 1.3 percent in the first quarter, well below the RBA's target of 2 - 3 percent.

    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 2.0 per cent.
The global economy is expanding at a moderate pace, but some key commodity prices are much lower than a year ago. Much of this trend appears to reflect increased supply, including from Australia. Australia's terms of trade are falling nonetheless.
The Federal Reserve is expected to start increasing its policy rate later this year, but some other major central banks are continuing to ease policy. Hence, global financial conditions remain very accommodative. Despite fluctuations in markets associated with the respective developments in China and Greece, long-term borrowing rates for most sovereigns and creditworthy private borrowers remain remarkably low.
In Australia, the available information suggests that the economy has continued to grow. While the rate of growth has been somewhat below longer-term averages, it has been associated with somewhat stronger growth of employment and a steady rate of unemployment over the past year. Overall, the economy is likely to be operating with a degree of spare capacity for some time yet. Recent information confirms that domestic inflationary pressures have been contained. That should remain the case for some time, given the very slow growth in labour costs. Inflation is thus forecast to remain consistent with the target over the next one to two years, even with a lower exchange rate.
In such circumstances, monetary policy needs to be accommodative. Low interest rates are acting to support borrowing and spending. Credit is recording moderate growth overall, with growth in lending to the housing market broadly steady over recent months. Dwelling prices continue to rise strongly in Sydney, though trends have been more varied in a number of other cities. The Bank is working with other regulators to assess and contain risks that may arise from the housing market. In other asset markets, prices for equities and commercial property have been supported by lower long-term interest rates. The Australian dollar is adjusting to the significant declines in key commodity prices.
The Board today judged that leaving the cash rate unchanged was appropriate at this meeting. Further information on economic and financial conditions to be received over the period ahead will inform the Board's ongoing assessment of the outlook and hence whether the current stance of policy will most effectively foster sustainable growth and inflation consistent with the target."


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