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Australia Keeps Cash Rate Unchanged

Jul 03 2012

Australia's central bank on Tuesday decided to keep the key interest rate unchanged as it awaits the pass through of the effects of the two consecutive rates cuts implemented this year aimed at shielding the economy from the worsening situation in Europe.

The Reserve Bank of Australia held the benchmark cash rate steady at 3.5 percent, as widely expected. This followed a 50 basis point reduction in May and a quarter-point cut in June.

Central bank governor Glenn Stevens noted that there has been a material easing in monetary policy over the past six months as a result of the sequence of earlier decisions. He said interest rates for borrowers have declined, to be a little below their medium-term averages.

Although today's statement showed that the bank preferred to stay on hold to assess the impact of the material easing it has already delivered, Westpac is of the view that rates need to go down further.

However, for the bank to consider further easing, Westpac believes that inflation update due later this month should be accommodative. Additionally, global economic outlook should worsen further, rendering the mood of firms and households cautious domestically.

The firm expects 25 basis point cuts in August and September each and a final cut of the same magnitude in the December quarter.

Economic growth in Australia has been stronger than had been earlier indicated in the first half of the year. Unemployment rate remained low despite job shedding in some industries.

The statement also said the bank's inflation outlook remained intact. RBA expects inflation, abstracting from the effects of the carbon price which came in to force on Sunday, to be consistent with the target over the coming one or two years. "Maintaining low inflation over the longer term will, however, require growth in domestic costs to slow as the effects of the earlier exchange rate appreciation wane," Stevens noted.

Business credit increased at a faster pace, though credit growth remains modest overall. The housing market remains subdued, he added.

Stevens said according to the Policy Board, the stance of monetary policy remained appropriate "with a more subdued international outlook than was the case a few months ago." Inflation outlook as well as close-to-trend growth also supported the current monetary policy.

Justifying the central bank action, building approvals in Australia posted a record 27.3 percent jump in May with the authorities giving nod for many major apartment projects, according to a report from the Australian Bureau of Statistics published Tuesday.

The policy board also pointed to weakening in Europe and a slower pace of growth in China. Conditions in other parts of Asia have recovered but could be dampened by the effects of slower growth outside the region. Growth in the US continued at a modest pace, the policymakers noted.

Even after a number of rate cuts since November last year, Australia has the highest borrowing costs among the developed economies. The economy has proved comparatively more resilient to global economic turbulence supported by its once-in-a-century mining boom.

In the upcoming policy reviews, the European Central Bank is expected to reduce interest rates and the Bank of England is seen adding more stimulus to counter the global gloom.

The material has been provided by Instaforex Company -
TAGS: Australia  Keeps  Cash  Rate  Unchanged   

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