Monday, June 5, 2017

Australia holds rate as economy continues to improve

    Australia's central bank left its benchmark cash rate steady at 1.50 percent, as expected, with today's policy statement largely mirroring its views from its previous statement from May.
      The Reserve Bank of Australia (RBA), which has maintained its rate since cutting it in August 2016, again said the depreciation of the Australian dollar since 2013 had helped the economy in its transition after the end of a boom in mining investment.
     "An appreciating exchange rate would complicate this adjustment," the RBA said, echoing its recent view.
    The Australian dollar, known as the Aussie, fell sharply in 2014 and 2015 but has been largely trading sideways since early 2016.
     Today the Aussie was trading at 1.34 to the U.S. dollar, up 3.7 percent since the start of this year, but still well below par to the U.S. dollar that was seen from 2011 to early 2013.
      The RBA said the broad-based pick-up in the global economy was continuing, with the rise in commodity prices providing a boost to Australia's income. Avrise in the prices of iron ore and coal, however, has eased in recent months.
     Australia is a major exporter of iron ore, coal, gold, crude oil and natural gas, with the rise in prices in the last year, following a slump in 2014, improving its export earnings.
      Business conditions in Australia have continued to improve, with higher capacity utilization and economic growth is still expected to rise gradually over the next couple of months to a bit over 3 percent, the RBA said.
     Australia's Gross Domestic Product grew by an annual rate of 2.4 percent in the fourth quarter of last year, up from 1.9 percent in the previous quarter but down from 3.1 percent in the second quarter.
     There are signs that some of the recent sharp rise house prices in parts of Australia are starting to ease, the RBA said, adding that a "considerable additional supply of apartments" is expected to come on stream in coming years and rent increases are now the slowest for two decades.
     However, growth in housing debt has outpaced the slow growth in household income, the central bank cautioned, adding that some lenders have raised their mortgage rates and recent supervisory measures should help tackle some of the risks from high and rising debt.
      Last month the RBA governor warned borrowers that interest rates were not going to remain at their current record low levels forever and households should be prepared for an increase in rates "at some point."

     The Reserve Bank of Australia issued the following statement:

"At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent.
The broad-based pick-up in the global economy is continuing. Labour markets have tightened further in many countries and forecasts for global growth have been revised up since last year. Above-trend growth is expected in a number of advanced economies, although uncertainties remain. In China, growth is being supported by increased spending on infrastructure and property construction, with the high level of debt continuing to present a medium-term risk. Commodity prices are generally higher than they were a year ago, providing a boost to Australia's national income. The prices of iron ore and coal, however, have declined over recent months as expected, unwinding some of the earlier increases.
Headline inflation rates in most countries have moved higher over the past year, partly reflecting the higher commodity prices. Core inflation remains low, as do long-term bond yields. Further increases in US interest rates are expected over the year ahead and there is no longer an expectation of additional monetary easing in other major economies. Financial markets have been functioning effectively.
Domestically, the transition to lower levels of mining investment following the mining investment boom is almost complete. Business conditions have improved and capacity utilisation has increased. Business investment has picked up in those parts of the country not directly affected by the decline in mining investment. Year-ended GDP growth is expected to have slowed in the March quarter, reflecting the quarter-to-quarter variation in the growth figures. Looking forward, economic growth is still expected to increase gradually over the next couple of years to a little above 3 per cent.  
Indicators of the labour market remain mixed. Employment growth has been stronger over recent months, although growth in total hours worked remains weak. The various forward-looking indicators point to continued growth in employment over the period ahead. Wage growth remains low and this is likely to continue for a while yet. Inflation is expected to increase gradually as the economy strengthens. Slow growth in real wages is restraining growth in household consumption.
The outlook continues to be supported by the low level of interest rates. The depreciation of the exchange rate since 2013 has also assisted the economy in its transition following the mining investment boom. An appreciating exchange rate would complicate this adjustment.
Conditions in the housing market vary considerably around the country. Prices have been rising briskly in some markets, although there are some signs that these conditions are starting to ease. In other markets, prices are declining. In the eastern capital cities, a considerable additional supply of apartments is scheduled to come on stream over the next couple of years. Rent increases are the slowest for two decades. Growth in housing debt has outpaced the slow growth in household incomes. The recent supervisory measures should help address the risks associated with high and rising levels of indebtedness. Lenders have also announced increases in mortgage rates, particularly those paid by investors and on interest-only loans.
Taking account of the available information, the Board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time."


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