Wait and See at the RBA

July 5, 2016

The Reserve Bank of Australia as expected retained a 1.75% Official Cash Rate after this month’s Board meeting and released a statement that made a number of points defending its decision.

  1. Inflation has been quite low. Given very subdued growth in labor costs and very low cost pressures elsewhere in the world, this is expected to remain the case for some time.
  2. Australia’s terms of trade remain much lower than they had been in recent years.
  3. Australia’s large contraction of investment is being countered by rising trends in other elements of aggregate demand including exports such that GDP is expanding overall.
  4. Low interest rates and a more competitive exchange rate are promoting growth.
  5. It’s too early to know the full effect of the British Brexit referendum.  The impact will become better known over time.  The British vote has caused financial markets to become more volatile lately.
  6. The housing market looks less worrisome.
  7. Having cut the interest rate by 25 basis points in May, officials feel a period of wait and assess as fresh data become known is the most prudent course of action to take.

May’s interest rate cut was the eleventh since November 2011.  Each except for a 50-basis point reduction in May 2012 was by 25 basis points.  The Official Cash Rate was 4.75% prior to November 2011 and is now three percentage points lower at 1.75%.  While discussing the British referendum, the statement did not address Australia’s own national election over the weekend, which produced ambiguous results.  No party won a parliamentary majority outright, creating the possibility of a hung parliament and producing some calls for Prime Minister Turnbull, who called the vote sooner than he needed, to step down.

Copyright 2016, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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