Australia holds rate, high AUD could make things difficult

April 5, 2016

By CentralBankNews.info
    Australia’s central bank left its benchmark cash rate steady at 2.0 percent, as widely expected, and confirmed its recent guidance that “continued low inflation would provide scope for easier policy, should that be appropriate to lend support to demand.”
    The Reserve Bank of Australia (RBA), which cut its rate by 50 basis points in 2015, added that incoming data will allow the board to assess the outlook for inflation and whether the improvement in the labour market was continuing.
     But in stark contrast to his statement last month, RBA Governor Glenn Stevens made a direct comment on the Australian dollar – known as the Aussie – saying the recent appreciation partly reflected higher commodity prices and easier monetary policy by other central banks.
    “Under present circumstances, an appreciating exchange rate could complicate the adjustment under way in the economy,” Stevens said.
    The Australian dollar started depreciating against the U.S. dollar in September 2014 and lost 11 percent in 2015, dragged down by slower growth in China, the main export market for Australia’s commodities.
    But since mid-January, the Aussie has firmed and rose further in response to Stevens’ comment. 
    The Aussie was quoted at 1.31 to the U.S. dollar, up from 1.32 prior to the RBA’s statement and 4.6 percent higher than at the start of the year.
    Given low inflation and subdued growth in labour costs, Stevens said it was appropriate for monetary policy to be accommodative to help support demand.
    After a fall in investment in the mining industry in recent years following a boom, Stevens said the economy was continuing to rebalance and economic growth had improved from 2015 as the pace of lending to businesses had also picked up.
    Australia’s inflation rate rose to 1.7 percent in the fourth quarter of last year from 1.5 percent in the preceding two quarters while Gross Domestic Product expanded by an annual rate of 3.0 percent compared with 2.7 percent in the third quarter.
    The unemployment rate fell to 5.8 percent in February from 6.0 percent in January.
    The RBA targets inflation 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.

Recent information suggests that the global economy is continuing to grow, though at a slightly lower pace than earlier expected. While several advanced economies have recorded improved growth over the past year, conditions have become more difficult for a number of emerging market economies. China’s growth rate has continued to moderate.
Commodity prices have generally increased a little recently, but this follows very substantial declines over the past couple of years. Australia’s terms of trade remain much lower than they had been in recent years.
Sentiment in financial markets has improved recently after a period of heightened volatility. However, uncertainty about the global economic outlook and policy settings among the major jurisdictions continues. Funding costs for high-quality borrowers remain very low and, globally, monetary policy remains remarkably accommodative.
In Australia, the available information suggests that the economy is continuing to rebalance following the mining investment boom. Consistent with developments in the labour market, overall GDP growth picked up over 2015, despite the contraction in mining investment. The pace of lending to businesses has also picked up.
Inflation is quite low. Recent information has confirmed that growth in labour costs remains quite subdued. Given this, and with inflation also restrained elsewhere in the world, inflation in Australia is likely to remain low over the next year or two.
Given these conditions, it is appropriate for monetary policy to be accommodative. Low interest rates are supporting demand, while supervisory measures are working to emphasise prudent lending standards and so to contain risks in the housing market. Credit growth to households continues at a moderate pace, albeit with a changed composition between investors and owner-occupiers. The pace of growth in dwelling prices has moderated in Melbourne and Sydney and has remained mostly subdued in other cities.
The Australian dollar has appreciated somewhat recently. In part, this reflects some increase in commodity prices, but monetary developments elsewhere in the world have also played a role. Under present circumstances, an appreciating exchange rate could complicate the adjustment under way in the economy.
At today’s meeting, the Board judged that there were reasonable prospects for continued growth in the economy, with inflation close to target. The Board therefore decided that the current setting of monetary policy remained appropriate.
Over the period ahead, new information should allow the Board to assess the outlook for inflation and whether the improvement in labour market conditions evident last year is continuing. Continued low inflation would provide scope for easier policy, should that be appropriate to lend support to demand.”
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