Australian Monetary Policy Declared "Appropriate" and Left on Hold

September 7, 2010

As widely expected, Australia’s Official Cash Rate (OCR) was left at 4.5%.  A statement from the Policy Board of the Reserve Bank of Australia observed that the terms of trade (export/import price ratio) is back at its 2008 high and buoying Australian incomes.  The overall economy has been growing at a clip that is near its trend pace, and this speed is expected to continue.  Credit and asset market conditions are called more “balanced” than six months ago.  Some areas have stabilized (e.g. business credit).  Others like real estate prices and mortgage finance have cooled from excessive levels.  The labor market has strengthened, core CPI is in the upper part of its target band, and total CPI inflation may remain just above the 3% target ceiling “for a few quarters.”  In the year to 2Q10, real GDP expanded 3.3%, and consumer prices rose 3.1%.  Between the first and second quarters, GDP grew 4.9% at an annualized pace.  The jobless rate of 5.3% in July was a half-percentage point lower than a year earlier, and jobs increased by a rapid 2.7% over the past twelve months.  Australia has a relatively low budget deficit of about 2.5% of GDP, which will trend lower now that fiscal stimulus is fading.  The current account deficit is comparatively larger at almost 4% of GDP

However, global economic uncertainties persist, and Aussie monetary policy has been tightened significantly already, with OCR increases of 25 basis points each last October, November, December, March, April and May.  The present value of the Aussie dollar, USD 0.9133, is much closer to its 12-month moving average high of USD 0.9405 hit November 16, 2009 than to its 12-month low of USD 0.8068 last May 25th.  The OCR setting is therefore now considered “appropriate” at least for the time being.

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.

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