Monday, August 4, 2014

Australia maintains rate, still sees period of stable rates

    Australia's central bank left its benchmark cash rate steady at 2.50 percent, as widely expected, and repeated its 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 maintained its rate since August 2013, also repeated that the exchange rate of the Australian dollar - known as the Aussie - "remains high by historical standards given the declines in key commodity prices, and hence is offering less assistance than it might in achieving balanced growth in the economy."
    The RBA is expected by financial markets to keep its interest rates steady for at least this year, but some economists are also starting to look to the RBA for any signs that it may change its neutral tone.
    Glenn Stevens, RBA governor, said monetary policy was appropriate to foster sustainable growth in demand and an inflation outcome that is consistent with the bank's target.
    "Looking ahead, continued accommodative monetary policy should provide support to demand and help growth to strengthen over time," Stevens added, a sign that the RBA is far from considering any tightening of policy in the near future.

    Australia's economy picked up speed in the first quarter, but the RBA said it was mainly due to very strong increases in resources exports as new capacity came on line and in coming quarters smaller increases in exports are likely.
    While consumer demand is growing moderately and housing construction is expanding strongly, the RBA said investment in the resources sector is starting to decline significantly and any signs of an improvement in investment in other sectors remain tentative.
    "Overall, the Bank still expects growth to be a little below trend over the year ahead," Stevens said.
    Australia's Gross Domestic Product expanded by 1.1 percent in the first quarter from the previous quarter for annual growth of 3.5 percent, up from 2.7 percent in the fourth quarter.
    Inflation picked up to 3.0 percent in the second quarter from 2.9 percent in the first quarter, but the RBA said growth in wages had declined noticeably and is expected to remain relatively modest in the period ahead, helping keep inflation in line with the RBA's target, even with lower levels of the exchange rate.
    The RBA, which targets inflation of 2.0 to 3.0 percent, said growth in the global economy was continuing at a moderate pace, helped by an improvement in advanced economies, and financial conditions overall remain very accommodative, with volatility in financial prices "currently unusually low" and emerging market economies are receiving capital inflows.
    "Markets appear to be attaching a very low probability to any rise in global interest rates, or other adverse event, over the period ahead," Stevens said, echoing a growing concern among central bankers that financial markets are currently overly optimistic.



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