Australian Monetary Policy Still on Hold

July 5, 2011

The Monetary Policy Board at the Reserve Bank of Australia left the Official Cash Rate unchanged at 4.75%.  There had been seven 25-basis point increases previously, the first six in October, November and December of 2009 and March, April and May of 2010 — but none since the seventh hike in November 2010.  A new statement from officials as it has for several months characterized the current policy stance as mildly restrictive and appropriate.

The statement is somewhat dovish in tone, suggesting that the policy pause may continue to very late 2011 and thus longer than analysts have been assuming.

  • Officials assert that “growth through 2011 is now unlikely to be as strong as earlier forecast.”
  • “Coal production in flooded mines continues to proceed more slowly than initially expected.”
  • Household behavior continues to be “cautious,” meaning both spending and credit demand.
  • Prices for houses and many other assets have softened.
  • A high Aussie dollar exchange rate is another dampening force.
  • The labor market has only confined pockets of skilled labor forces and moderating growth in jobs.
  • Core inflation is in the lower half of its target range.
  • Near-target overall inflation, that is between 2% and 3%, seems likely during the coming 12 months.
  • “Commodity prices have generally softened of late.”
  • The international environment is “challenging,” and financial markets have exhibited “uncertainty and volatility.”

Australian real GDP plunged 4.7% at an annualized rate in 1Q11, affected by severe floods, and was only 1.0% greater than in the first quarter of 2010.  The floods also boosted food prices and lifting overall CPI inflation to 3.3% in 1Q.  Second-quarter consumer price data due late this month may already show that the effect of the floods has begun to dissipate.

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



Comments are closed.