Monday, October 5, 2015

Australia holds rate, data still to determine next move

     Australia's central bank left its benchmark cash rate steady at 2.0 percent, as expected, and confirmed its guidance that new information on economic and financial conditions would determine whether its current stance fosters sustainable economic growth and inflation in line with its target.
    The Reserve Bank of Australia (RBA), which has cut its rate by 50 basis points this year to counter slower growth from reduced demand for its raw materials, repeated its view from August that the country's economy is continuing to expand moderately and its policy stance needs to be accommodative to support borrowing and spending.
    The RBA also repeated that the country's economy was likely to be operating with spare capacity for some time with inflationary pressures contained so inflation would remain consistent with the bank's target over the next one to two years, even with a lower exchange rate.
    Australia's inflation rate rose to 1.5 percent in the second quarter from 1.3 percent in the first quarter, below the RBA's target of 2-3 percent. Gross Domestic Product in the second quarter expanded by only 0.2 percent from the first quarter for annual growth of 2.0 percent.
    The Australian dollar has been depreciating since September 2014 but over the last month it has firmed slightly. It was trading at 1.40 to the U.S. dollar today, down almost 13 percent this year.

    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, with some further softening in conditions in China and east Asia of late, but stronger US growth. Key commodity prices are much lower than a year ago, in part reflecting increased supply, including from Australia. Australia's terms of trade are falling.
The Federal Reserve is expected to start increasing its policy rate over the period ahead, but some other major central banks are continuing to ease policy. Equity market volatility has continued, but the functioning of financial markets generally has not, to date, been impaired. Long-term borrowing rates for most sovereigns and creditworthy private borrowers remain remarkably low. Overall, global financial conditions remain very accommodative.
In Australia, the available information suggests that moderate expansion in the economy continues. While growth has been somewhat below longer-term averages for some time, it has been accompanied 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, with domestic inflationary pressures contained. 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 and Melbourne, though trends have been more varied in a number of other cities. Regulatory measures are helping to contain risks that may arise from the housing market. In other asset markets, prices for commercial property have been supported by lower long-term interest rates, while equity prices have moved lower and been more volatile recently, in parallel with developments in global markets. 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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