Monday, July 5, 2010

RBA Waits and Watches the World

The RBA (Reserve Bank of Australia) today left interest rates unchanged at 4.50% for a second time as it continued to wait and see. Indeed it is probably the correct move given that it has tightened reasonably aggressively, and probably finds itself near neutral at present. The next move will be dependent on whether the Australian economy strengthens further (or indeed, if the global economic and financial system goes into relapse).
"The current setting of monetary policy is resulting in interest rates to borrowers around their average levels of the past decade. Pending further information about international and local conditions for demand and prices, the Board views this setting of monetary policy as appropriate"

The RBA echoed similar comments about the Australian economy in its monetary policy announcement, noting jobs growth, improving spending, credit conditions etc (but tempered a little), but focused mostly on the international picture. Indeed, what is perhaps most notable about the announcement is the length at which they discuss the global economic outlook and situation in the first paragraph:
"The global economy has continued to expand over recent months, consistent with a trend pace of growth. The expansion remains uneven, with the major advanced countries recording only modest growth overall, but growth in Asia and Latin America, to date, very strong. There are indications that growth in China is now starting to moderate to a more sustainable rate. In Europe, while output in some key countries has been improving recently, prospects for next year are more uncertain given the budgetary constraints governments face and the pressure on euro area banks. US growth has looked stronger in the first half of 2010 but the pace of labour market improvement is slow."

So in many ways the RBA has dealt with the Australian part of the recovery, but now it just has to sit on its hands and closely monitor the global part of the recovery. If there's anything we learned from the great financial crisis, it's that the world; the economic and financial systems, the social and political systems, are only growing more and more interconnected.

Econ Grapher Analytics
Reserve Bank of Australia

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