By CentralBankNews.info
Australia’s central bank left its benchmark cash rate at 1.75 percent but signaled it was ready to change its policy stance when it has further data on the outlook for growth and inflation.
The Reserve Bank of Australia (RBA), which cut its rate by 25 basis points in May, described today’s decision to maintain the rate as “prudent,” but added that “over the period ahead, further information should allow the Board to refine its assessment of the outlook for growth and inflation and to make any adjustment to the stance of policy that may be appropriate.”
Today’s guidance by RBA Governor Glenn Stevens compares with his statement in June that merely said the decision to keep the rate steady was consistent with sustainable growth and inflation returning to target.
As in June, Stevens said low interest rates and the lower exchange rate of the Australian dollar, known as the Aussie, had been helping the country’s economy adjust “though an appreciating exchange rate could complicate this.”
Following Stevens’ comments on May 2, the Aussie depreciated during the rest of the month but this month it reversed course and rose.
Today it was trading at 1.33 to the U.S. dollar, up 3 percent since the start of this year but down 8.3 percent since the beginning of 2015.
The RBA’s decision to maintain its rate today was widely expected by economists who expect the RBA to cut its rate in the third quarter following inflation data for July.
Stevens also noted that financial markets had become volatile since the U.K. vote to leave the European Union (EU) but the impact of the vote on global economic activity was still too early to see and may even be hard to discern.
First quarter growth in Australia’s economy topped expectations, with Gross Domestic Product rising by an annual rate of 3.1 percent, up from 2.9 percent in the previous quarter.
Inflation in the first quarter eased to 1.3 percent from 1.7 percent and well below the RBA’s target 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 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 has moderated further, 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.
Financial markets have been volatile recently as investors have re-priced assets after the UK referendum. But most markets have continued to function effectively. Funding costs for high-quality borrowers remain low and, globally, monetary policy remains remarkably accommodative. Any effects of the referendum outcome on global economic activity remain to be seen and, outside the effects on the UK economy itself, may be hard to discern.
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 a modest pace of expansion in 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 since 2013 is helping the traded sector. Financial institutions are in a position to lend and credit growth has been moderate. 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 risen again in many parts of the country over recent months. 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, the Board judged that holding monetary policy steady would be prudent at this meeting. Over the period ahead, further information should allow the Board to refine its assessment of the outlook for growth and inflation and to make any adjustment to the stance of policy that may be appropriate.”