No Change in Australia’s "Still Appropriate" Monetary Policy

February 1, 2011

Following the two-month summer interval since the last RBA Board policy meeting, the Official Cash Rate (OCR) was kept at 4.75%, meeting analyst expectations.  Seven previous rate hikes, most recently last November and initially in October 2009, were implemented.  Australia is one of very few advanced economies not to experience a recession in 2008-09, in part in response to timely and forceful fiscal and monetary policy stimulus.  Prior to the world recession, Australia’s OCR peaked at 7.25%.

A statement released today by the Reserve Bank of Australia concluded that monetary policy remains “appropriate in view of the general macroeconomic outlook.”  Core inflation last year was around 2.25%, and total inflation in 2011, which went up about 2-3/4% in 2010, is projected to run consistently with its 2-3% target.  Australia’s terms of trade is the best its been since the early 1950s, a point officials have made repeatedly recently, but consumer spending and borrowing “continues to be cautious,” overall credit growth is “quite subdued,” and jobs are likely to expand more slowly this year than last.  Asset prices are generally steady.

The massive and ongoing flooding in the country’s northeast will depress growth and lift inflation temporarily.  Officials are monitoring the situation but hope to “look through the estimated effects of these short-term events” and keep their policy focus on medium-term prospects for economic activity and prices.  For now, a 4.75% key interest rate provides sufficient restraint, but that is unlikely to be a cyclical peak.  There is no hint of the timing of the next move.  Six months went by between the sixth and seventh interest rate increases.

Copyright Larry Greenberg 2011.  All rights reserved.  No secondary distribution without express permission.



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