Australia holds rate on sustainable growth after May cut

June 7, 2016

By CentralBankNews.info
Australia’s central bank left its benchmark cash rate steady at 1.75 percent, saying this rate was consistent with sustainable growth and inflation returning to its target given an easing of policy last month.
The Reserve Bank of Australia (RBA), which cut its rate by 25 basis points in May, added that the economy was continuing to grow but inflation remains “quite low” and is expected to remain low for some time given the subdued growth in labour costs and global cost pressures.
Since the rate cut in May, data showed that Australia’s economy grew by a better-than-expected annual rate of 3.1 percent in the first quarter of this year, up from 2.9 percent in the fourth quarter, pushing down expectations for another RBA rate cut this year, though most economists still expect at least one more cut during the year.
Australia’s inflation rate rose by only 1.3 percent in the first quarter of this year, down from 1.7 percent in the fourth quarter and well below the RBA’s target of 2-3 percent.
In his statement, RBA Governor Glenn Stevens said low interest rates were helping support domestic demand and the lower exchange rate of the Australian dollar had helped the traded sector.
Growth in credit to businesses had picked up, assisting the economy to make the necessary adjustments to lower investment “though an appreciating exchange rate could complicate this,” Stevens said, once again voicing his preference for a lower exchange rate.
After depreciating against the U.S. dollar since September 2014, the Australian dollar – known as the Aussie – has been rising since mid-January this year on the back of higher iron ore prices. Just over half of the world’s iron ore exports come from Australia.
The slowdown in China’s economy dented demand for Australian commodities and in 2015 the Aussie lost 11 percent against the dollar.
In response to the May 2 rate cut, the Aussie fell, but this month it has firmed again as the strong growth figures dented speculation of another rate cut. Today the Aussie firmed further to 1.347 to the dollar, up from 1.357 prior to the policy decision and up by 1.7 percent since the start of this year.

The Reserve Bank of Australia issued the following statement:

“At its meeting today, the Board decided to leave the cash rate unchanged at 1.75 per cent.

The global economy is continuing to grow, at a lower than average pace. Several advanced economies have recorded improved conditions over the past year, but conditions have become more difficult for a number of emerging market economies. China’s growth rate moderated further in the first part of the year, though recent actions by Chinese policymakers are supporting the near-term outlook.

Commodity prices are above recent lows, 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.

In financial markets, conditions have generally been calmer for the past several months following the period of volatility early in the year. Attention is now turning to some particular event risks. Funding costs for high-quality borrowers remain very low and, globally, monetary policy remains remarkably accommodative.

In Australia, recent data suggest overall growth is continuing, despite a very large decline in business investment. Other areas of domestic demand, as well as exports, have been expanding at a pace at or above trend. Labour market indicators have been more mixed of late, but are consistent with continued expansion of employment in the near term.

Inflation has been quite low. Given very subdued growth in labour costs and very low cost pressures elsewhere in the world, this is expected to remain the case for some time.

Low interest rates have been supporting domestic demand and the lower exchange rate overall is helping the traded sector. Over the past year, growth in credit to businesses has picked up, even as that to households has moderated a little. These factors are all assisting the economy to make the necessary economic adjustments, though an appreciating exchange rate could complicate this.

Indications are that the effects of supervisory measures have strengthened lending standards in the housing market. Separately, a number of lenders are also taking a more cautious attitude to lending in certain segments. Dwelling prices have begun to rise again recently. But considerable supply of apartments is scheduled to come on stream over the next couple of years, particularly in the eastern capital cities.

Taking account of the available information, and having eased monetary policy at its May meeting, the Board judged that holding the stance of policy unchanged at this meeting would be consistent with sustainable growth in the economy and inflation returning to target over time.”

InvestMacro

Australia holds rate on sustainable growth after May cut