No Change in Australia’s 2.5% Official Cash Rate

March 4, 2014

Today’s interest rate policy statement speaks of mixed Australian growth prospects, a softer labor market, accommodative financial and monetary conditions.  Moderating price inflation among non-traded goods is projected, and overall inflation on the present policy settings is seen staying within the targeted boundaries of 2% and 3%.  Officials seek better balance in economic growth and are counting upon a declining exchange rate to help make that happen.  Whereas the prior statement released in February seemed to signal that the Aussie dollar had fallen enough, this month’s statement welcomes the Aussie dollar’s recent decline but adds a clause that “the exchange rate remains high by historical standards.”  This insertion is a subtle way to invite more weakness in the currency. 

Eight reductions of the officials cash rate (OCR) were implemented from November 2011 and August 2013.  The OCR fell over the period from 4.75% to 2.5%.

All last year, officials had retained a bias to cut the interest rate further if deemed necessary.  The bias is now neutral, and the message goes further to imply a desire not to raise or lower the OCR for some time:  “the most prudent course is likely to be a period of stability in interest rates.”  That’s not to say that easier monetary conditions would be unwelcome, but the hope is that such occurs via somewhat additional depreciation in the Australian dollar.

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



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