Australian Cash Rate Not Raised This Month

February 1, 2010

The Reserve Bank of Australia cash rate was somewhat unexpectedly left at 3.75%, but the statement from officials noted that “if economic conditions evolve broadly as expected, the Board considers it likely that monetary policy will, over time, need to be adjusted further in order to ensure that inflation remains consistent with the target over the medium term.”  The statement observes that borrowing rates have climbed already about 100 basis points, more than the cash rate’s cumulative 75-bp advance since end-September, and officials apparently wish to see how the economy responds to the increase in rates rather than tighten additionally at this time.  Policymakers may have been deterred by today’s sharp reported 11-point drop to +8 in business confidence last month from +19 in November, +16 in October, +14 in September and +18 in August.

Business conditions, which remained at +10 last month, remain good, however.  The labor market has sizzled, and net household wealth has improved.  Residential construction, resource-sector investment, and public spending on infrastructure are each lending the economy support in addition to private consumption.  Large firms are getting the financing help they need, but credit conditions for smaller firms remain more problematic.

From September 2008 through April 2009, the cash rate was chopped in six steps from 7.25% to 3.0%.  Once in became apparent that the 2009 downturn had been only mikl and that inflation was not decelerating as much as anticipated initially, rate hikes of 25 basis points each were initiated in early October and followed up in November and December.  Officials are unwilling to tighten more than gradually but determined to return rates to normal settings in a persistent way.  The quarterly Monetary Policy Statement due Friday will shed more light and detail on how policymakers see Australia’s recovery developing and the kind of policy moves that is likely to entail.  Today’s statement did note that inflation is expected to stay in target this year.

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



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