Wait-and-See Approach at the Reserve Bank of Australia

November 6, 2012

Many analysts anticipated a sixth interest rate cut that didn’t come in November.  The RBA’s Board had previously cut the official cash rate by 25 basis points in November and December of 2011, 50 bps in May 2012, and 25 bps each in June and October.  The OCR rate is now at 3.25%.

A statement on the RBA website notes that “monetary policy has become more accommodative” and adds that “there are signs of easier conditions starting to have some of the expected effects. Business demand for external funding has increased this year, the housing market has strengthened and share prices have risen in line with markets overseas.”  Officials moreover believe that prior stimulus will continue to impact the economy over coming months, justifying a wait-and-see approach to confirm how much additional boost results.

The statement also points out that recent inflation has been slightly higher than expected, although consistent with achievement of in-target inflation in the policy time horizon.  The Aussie dollar is stronger than officials fell fundamentals like export and import prices warrant, but the disinflationary impact is now waning.  Growth “has been running close to trend over the past year,” and the peak in resource-sector business investment should pass sometime next year.

The statement doesn’t rule out an eventual further interest rate cut and makes no assertion about when a tightening cycle will need to begin.  For now, however, the current 3.25% OCR is deemed appropriate.

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

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