Reserve Bank of Australia Holds its Fire

March 3, 2015

Analysts were pretty evenly split prior to the March Board meeting between no change in Australia’s official cash rate and a 25-basis point reduction to 2.0%.  It would have been the second straight easing, but officials opted to leave its stance instead unchanged.

At today’s meeting the Board judged that, having eased monetary policy at the previous meeting, it was appropriate to hold interest rates steady for the time being. Further easing of policy may be appropriate over the period ahead, in order to foster sustainable growth in demand and inflation consistent with the target.

A 25-basis point cut in February to 2.25% from 2.5% was the first rate change since August 2013 but the ninth cut in the current easing cycle going back to November 2011.  Those nine moves totaled 250 basis points from a prior peak of 4.75%.  In a statement released earlier today, the Board reaffirmed points made after past meetings:

  • The Aussie dollar remains fundamentally overvalued despite depreciation and should fall further to promoted better balanced growth.
  • Australian growth will continue at a sub-trend pace with “quite weak” domestic demand.
  • The existence of spare capacity for “some time yet” along with “subdued” labor costs will keep CPI inflation in target for the next year or two even if the Aussie dollar depreciates as it should.
  • Credit demand for construction and housing prices particularly in the Sydney area remain strong.  Officials are monitoring the situation for potential rising risks.

The housing market appears to be what deterred the Board from enacting a tenth rate cut now.  Building approvals jumped 7.9% on month in seasonally adjusted terms in January, the second rise of more than 7.0% in three months.  On-year growth in building permits stands at 9.1%.

Copyright 2015, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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