Reserve Bank of Australia Flags New Risk of a Rate Reduction

October 4, 2011

The Reserve Bank of Australia’s Policy Board meets monthly except in January.  Policy had a tightening bias since the autumn of 2009.  After the September 6th meeting this year, officials had reaffirmed that “growth is still likely to be at trend or higher” and reminded investors that “the Board remains concerned about the medium-term outlook for inflation.”  In contrast, today’s meeting introduced an easing policy bias:

An improved inflation outlook would increase the scope for monetary policy to provide some support to demand, should that prove necessary…. The path for inflation may now be more consistent with the 2–3 per cent target in 2012 and 2013.

The change in policy bias was made because of shifting views on both inflation and growth.  First, revised data show that core inflation has risen less steeply than estimated initially, and labor cost pressures seems to be lessening.  Second, near-term growth prospects have been trimmed.  “Cautious behavior by households and the earlier rise in the exchange rate have had a noticeable dampening effect. The impetus from earlier Australian government spending programs is now also abating.”

To be sure, the Policy Board only shifted its bias.  The Official Cash Rate remains 4.75%, where such has been since a 25-basis point rate hike last November, which culminated a series of seven such increases beginning in October 2009.  Previously, six reductions were implemented between September 2008 and April 2009 that cumulated to 425 basis points from a prior peak of 7.25%.  Powerful fiscal and monetary support enabled Australia to be one of very few advanced economies to avoid an outright recession in 2008-09.

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



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