Australian Official Cash Rate Held at 4.5% for Third Straight Time

August 3, 2010

Monetary officials left their policy steady, called the present stance “appropriate” in a newly released statement, and gave no hint about the timing or direction of the next possible rate change.  Note was made that borrowing rates are now in line with their ten-year averages, and officials predicted near-trend growth and near-target inflation but warned about global uncertainties.  Analysts had not expected a rate change this month.

The Reserve Bank of Australia (RBA) policymakers had been aggressive both on the interest rate downswing and in normalizing policy once they realized that Australia was among the very few advanced economies to avoid a recession. 

  • Rate cuts from a prior cyclical peak of 7.25% were implemented of 25 basis points in September 2008 followed by 100 bps in October, 75 bps in November, 100 bps in December, 100 bps in February 2009, and 25 bps in April.  At 3.0% from April 2009 until October 2009, the cash rate was at its lowest level since March 1960.
  • Just as they had cut six times in seven months, monetary officials raised their key rate six times in seven months, but this time all the moves — implemented in October, November, December, March 2010, April and May were by a cautious 25 basis points.

Today’s statement calls global economic prospects “more uncertain than a few months ago” but balances that observation with a note that Australia’s terms of trade, the export/import price ratio that strongly influences domestic demand in the country, is back near its 2008 peak.  House price inflation has cooled, but business spending is likely to quicken.  Above-target CPI inflation will continue for a while because of the distorting impact of tobacco tax increases and higher utility rates, but core inflation should stay within its target band but above the range’s midpoint.  Interestingly, the statement does not explicitly mention the significantly lower-than-projected CPI results announced July 28 for the second quarter.  In such, the overall index went up 0.6%, only two-thirds as much as forecast, and core inflation eased to 2.7% from 3.0-3.1% in the first quarter and 3.9% in the second quarter of 2009.  Real GDP growth slowed in 1Q to 2.0% annualized and was 2.7% greater than in the first quarter of 2009.  Some analysts are wondering if perhaps officials might have raised interest rates too hastily.

The RBA Policy Board meets eleven times per year, once each month except during January.

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



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