A Message From the Reserve Bank of Australia

June 2, 2009

Coming into this month’s RBA policy meeting, more and more analysts were predicting no more Australian interest rate changes before 2011.  A chief role of transparent monetary policymaking is to correct investors misconceptions early lest big surprises result.  Data released prior to today’s central bank announcement would have fanned the view that the 3.0% cash rate represents a cyclical floor.  Australia’s current account improved by enough in 1Q09 to create a good chance that economic growth reverted to positive territory, and building approvals posted their third straight solid advance in March.  The most important section of the central bank statement was saved for the final paragraph.

The prospect of inflation declining over the medium term suggests that scope remains for some further easing of monetary policy, if needed.  In assessing how it might use that scope, the Board will continue to monitor how economic and financial conditions unfold, and how they impinge on prospects for a sustainable recovery in economic activity.

The latest statement, like those from other central banks, stresses signs that the recession may be stabilizing, helped by a generous dose of macroeconomic support, but notes that fragile confidence,stressed balance sheets, and tight credit persist.  Softer demand for labor and lower capacity usage will promote downwardly trending inflation.  As expected, the 49-year low cash rate of 3.0% was retained, but officials served notice that further reductions are possible and indeed likely if recovery does not emerge to the extent assumed.  The statement does not refer to the recent significant appreciation of the Aussie dollar. In my preview, I flagged that development as one with a a potential if it continued for being the most likely catalyst for cutting rates below 3% in the future.  I still believe that.

Copyright 2009 Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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