Reserve Bank of Australia: Wait and See

August 7, 2012

At today’s meeting, the Board judged that, with inflation expected to be consistent with the target and growth close to trend, but with a more subdued international outlook than was the case a few months ago, the stance of monetary policy remained appropriate.

So concludes the latest RBA Policy Board statement.  Several points are made to support this conclusion.

  1. The world economy is growing more softly but China does not appear to be “slowing further.”
  2. Europe will “remain a potential source of adverse shocks for some time.”
  3. Long-term interest rates have declined to “exceptionally low levels.”
  4. Australian banks have had no difficulty accessing funding.
  5. The Australian terms of trade peaked a year ago but remains historically high, supporting domestic growth.
  6. “Maintaining low inflation over the longer term will require growth in domestic costs to continue their recent moderation as the effects of the earlier exchange rate appreciation wane.”
  7. “The exchange rate, however, has remained high, despite the observed decline in the terms of trade and the weaker global outlook.”

Australia’s Official Cash Rate remains at 3.5% after four reductions totaling 125 basis points administered between November 2011 and June of this year.  This easing makes the current policy stance “easier than it was for most of 2011, with interest rates for borrowers a little below their medium-term averages.”  Reading between the lines, another rate cut cannot be ruled out because Europe is a wild card factor.  But officials seem to think that sufficient stimulus has been provided and are reminding markets that policy in the longer run may need to be tightened to keep inflation consistent with target beyond the immediate 1-2 year time horizon.  For now, however, officials prefer to wait and see the effect of their previous series of rate reductions on growth and inflation before introducing to any further changes.

Copyright 2012, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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