No Hint of When Australian Rate Increases Might Resume

June 1, 2010

The Reserve Bank of Australia left its Official Cash Rate (OCR) at 4.5%, matching analyst expectations.  Officials had dropped many hints that policy is now on pause.  There had previously been six rate hikes of 25 basis points each, starting last October and with follow-up moves in November, December, March, April and May.  No central bank has raised rates by more than the cumulative 150 basis points done by Australia’s central bank.  The OCR had been slashed in 2008-9 from 7.25% to a trough of 3.0% in a pre-emptive move to mitigate a feared recession.  Fiscal policy had also been stimulated sharply.  Those pro-active policy responses, plus stronger-than-assumed Asian demand and higher commodity export prices, enabled Australia to dodge any recession at all.

A statement released today by Governor Glenn Stevens puts new world growth uncertainties associated with the European sovereign debt crisis front and center in policymaking.  The drops in equities, which have been especially steep today, and many government bond yields are mentioned in his statement.  The impact of coming fiscal austerity remains to be seen.  The statement observes recent declines in the Aussie dollar and some commodity prices.  While RBA officials project on-trend growth this year in the world and Australia, the impression is left that risks are skewed downward although the statement does not explicitly say as much.  What it does reiterate is that Australian borrowing rates have risen to around their decade-old average levels from very expansionary settings for much of 2009.  The statement conspicuously makes no mention of what variables will guide future policy moves other than to say that inflation is likely to run in the upper half of the target zone.  One is left to assume that no urgency is attached to raising rates further before the impact of the European crisis can be assessed fully.  That’s likely to take some time.

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