Monday, December 6, 2010

Reserve Bank of Australia Holds Cash Rate at 4.75%

The Reserve Bank of Australia did what was expected and signaled this time around, leaving the cash rate at 4.75%, pausing again on its stop-start path to monetary policy normalization. The RBA increased the cash rate in November by 25bps, in spite of sending somewhat contradictory signals to the market. However for now it looks like this pause will also persist for a few months...
"Following the Board's decision last month to lift the cash rate, and the subsequent increases by financial institutions, lending rates in the economy are now a little above average. The Board views this setting of monetary policy as appropriate for the economic outlook."

The RBA in its announcement noted the positive impact on national income of having the terms of trade at its highest level since the 1950's, and of course the positive impact of high commodity prices on private investment. However the other part of the Aussie economy is pretty much chugging along behind the scenes at the same pace of other stricken developed economies like the US, UK, and New Zealand. I.e. the non-mining part of the economy is kinda US-like, but if the mining part of the economy can flow through to the rest of the economy then the Australian economic outlook should be relatively favorable.
"The exchange rate has risen significantly this year, reflecting the high level of commodity prices and the respective outlooks for monetary policy in Australia and the major countries. This will assist, at the margin, in containing pressure on inflation over the period ahead. Over the next few quarters, inflation is expected to be little changed, though it is likely to increase somewhat over the medium term if the economy grows as expected."

In summary, the Australian economy is relatively well placed at the moment. It is - as a whole - doing better than most developed economies thanks to its booming mining sector (thanks emerging markets), and with luck the economic recovery (though technically Australia didn't have a recession) should become more broad-based over time. On the inflation front it's basically an economic growth story - if the growth comes through then so will inflation. So for now it is the right move for the RBA to hold rates steady, and it will likely hold-off raising rates again until about Q2-Q3 next year, but of course the key dependency is the econ growth path.

Econ Grapher Analytics
Reserve Bank of Australia
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