Reserve Bank of Australia Monetary Policy Neutralisation

The Reserve Bank of Australia held rates steady at 4.50% as predicted, and expected by most. The RBA talked extensively about the developments in Europe and their implications for Australian monetary policy and the broader global economy and financial markets. In terms of monetary policy tightening it appears as though the RBA has found a convenient plateau in its monetary policy neutralisation:

"Consistent with that outlook, and as a result of actions at previous meetings, interest rates to borrowers are around their average levels of the past decade, which is a significant adjustment from the very expansionary settings reached a year ago. Taking all the available information into account, the Board views this setting of monetary policy as appropriate for the near term."

The RBA also noted the strength of the Australian economy, noting the positive impact of a high terms of trade, spurring growth above trend. We will get an update on the Australian economy in the next couple of days with the GDP figure expected to come in at about 2.6% year on year.

"In Australia, with the high level of the terms of trade expected to add to incomes and demand, output growth over the year ahead is likely to be about trend, even though the effects of earlier expansionary policy measures will be diminishing. Inflation appears likely to be in the upper half of the target zone over the next year."

Australia has lead the charge in exiting from monetary policy stimulus, and has arrived close to a neutral level (neutral for now at least), the normalisation has become neutralisation now. This pause reflects in part the still heightened level of risks in the global economy. The credit crisis taught us one thing - everything is connected. So trouble in Europe, or overheating in Asia can't be ignored or even only casually noted, Australia - as a participant in the global economy - remains at risk to most imaginable wildcards that might pop-up in the near term. But those aside, the fundamentals are strong, and the policy is sensible.

Sources
Econ Grapher Analytics www.econgrapher.com
Reserve Bank of Australia www.rba.gov.au
Australian Bureau of Statistics www.abs.gov.au

Article source: http://www.econgrapher.com/1june-rba.html