Australia holds rate, past cuts having expansionary effect

    Australia's central bank left its benchmark cash rate unchanged at 3.0 percent, as expected, and repeated that low inflation would allow it to reduce rates if necessary but private consumption is on the rise and there are "number of indications" that past rate cuts are "having an expansionary effect on the economy."
    The Reserve Bank of Australia (RBA), which embarked on an easing cycle in October 2011, said the impact of those rate cuts would continue to emerge over time but this stimulative effect is countered by a higher-than-expected exchange rate and demand for credit remains low as firms and households continue to pay down their debt.
    The RBA, which cut rates by a total of 175 basis points between October 2011 and December 2012, appears slightly more confident about the prospects for Australia's recovery compared with March when it only saw "signs" of the impact of recent rate cuts.
    However, the RBA still sees economic growth below trend this year, and with inflation in line with its target, "an accommodative stance of monetary policy is appropriate," the central bank said, adding:
    "The inflation outlook, as assessed at present, would afford scope to ease policy further, should that be necessary to support demand," the RBA said, quoting its governor, Glenn Stevens.

    Australia's inflation rate in the fourth quarter rose for the third quarter in a row to 2.2 percent and the RBA said labour costs remained contained while businesses are focused on improving efficiency, factors that should keep inflation low.
    The central bank said it expects inflation to be consistent with its 2-3 percent target over the next one to two years. In its latest forecast, the RBA projects inflation of 3.0 percent in the year to June 30.
   Australia's Gross Domestic Product rose by 0.6 percent in the fourth quarter of 2012 from the third quarter for annual growth of 3.1 percent, the same rate as in the third quarter.
    The RBA said last year's growth was close to trend, led by the large increases in investments in capital resources and "looking ahead the peak in resource investment is drawing close."
    Although the near-term outlook for investment outside the resource sector is still relatively subdued, the RBA said a "modest increase is likely to begin over the next year."
    Echoing its March statement, the RBA said the downside risks to global growth appear to have lessened. However, growth worldwide is still forecast to be below average for a time and the task of putting private and public finances on sustainable paths is far from complete which leaves financial markets vulnerable to setbacks.
    The RBA was widely expected to leave rates on hold, with labor market data in mid-March strengthening the view that is has finished its policy easing cycle. The unemployment rate in February remained steady at 5.4 percent, the same as in the last three months, despite expectations that it would rise, with the biggest gain in payrolls in almost 13 years.
 
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