Reserve Bank of Australia Adopts Neutral Interest Rate Guidance

February 4, 2014

The RBA Board engineered eight reductions of the official cash rate spaced between November 2011 and August 2013 and totaling 225 basis points in all.  The 2.5% OCR level over the past half year represented a record low, yet the ensuing monthly policy announcements from September through December left the door open to possible additional stimulus and explicitly protested the strength of the Australian currency.  In December, for example, officials had said, “the Australian dollar, while below its level earlier in the year, is still uncomfortably high. A lower level of the exchange rate is likely to be needed to achieve balanced growth in the economy.”  Reading between the lines, officials were hoping to ease monetary conditions further through Aussie dollar depreciation rather than an even lower interest rate but were fully prepared to cut the OCR if Aussie dollar strength stayed excessive. 

The RBA Board meets eleven times annually, always taking a pass in January when it’s mid-summer and a particularly hot one this year.

Today’s statement, which explains why the OCR was again kept at 2.5%, introduces more neutral language in discussing future likely policy.

In the Board’s judgement, monetary policy is appropriately configured to foster sustainable growth in demand and inflation outcomes consistent with the target. On present indications, the most prudent course is likely to be a period of stability in interest rates.  The Bank expects growth to remain below trend for a time yet and unemployment to rise further before it peaks. Beyond the short term, growth is expected to strengthen, helped by continued low interest rates and the lower exchange rate. Inflation is expected to be somewhat higher than forecast three months ago, but still consistent with the 2–3 per cent target over the next two years.

And for once, officials are not seeking further exchange rate depreciation, just a retention of the decline that has already occurred.  “The exchange rate has declined further, which, if sustained, will assist in achieving balanced growth in the economy.” 

The shifted message lifted the Aussie dollar to a 3-week high today.  Officials no doubt hope that spike is just that, a temporary blip.  Otherwise, the new stance may be revisited.

Copyright 2014, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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