Australian Monetary Policy Unchanged but with a Possibility of Ease in May

April 3, 2012

The Reserve Bank of Australia’s 4.25% Official Cash Rate (OCR) was not cut at the April Board meeting, nor had such been expected.  After cuts of 25 basis points each last November and December and no scheduled meeting in January, officials have considered the 4.25% OCR “appropriate” and did not reduce it any further as the past three meetings, including today’s.

Nevertheless, the concluding paragraph of this month’s central bank policy announcement leaves the door open to possible easing next month.

The Board eased monetary policy late in 2011. Since then, its judgement has been that, with growth expected to be close to trend, inflation close to target and lending rates close to average, the setting of monetary policy was appropriate. The Board’s view was also that, were demand conditions to weaken materially, the inflation outlook would provide scope for easier monetary policy. At today’s meeting, the Board judged the pace of output growth to be somewhat lower than earlier estimated, but also thought it prudent to see forthcoming key data on prices to reassess its outlook for inflation, before considering a further step to ease monetary policy.

Points made earlier in the statement stressed that

  1. Global growth is below trend but not in a “deep downturn.”
  2. Australia’s terms of trade, which strongly influences domestic growth, has peaked but remains high.
  3. Australian output growth has been somewhat below trend.
  4. The housing market is soft, and the Aussie dollar remains elevated.
  5. In-target CPI inflation between 2% and 3% is likely over the next 1-2 years.
  6. Upcoming CPI and PPI data will be an important determinant of whether the OCR is cut in May.

OCR History: The OCR was slashed in six moves from 7.25% prior to September 2008 to 3.0% by April 2009, which helped Australia avoid being sucked into the Great Recession.  Rate normalization began in October 2009 with a 25-bp rate increase.  Subsequent similar-sized hikes were made in November and December of 2009 as well as March, April, May and November of 2010.  The OCR stood at 4.75% for 12 months until the cut in November 2011.

Copyright 2012, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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