The Reserve Bank of Australia concluded its first monetary policy meeting of 2016 today and left its cash rate unchanged at 2.0%. The Bank last cut rates in May 2015 but has been largely neutral since August following the Australian dollar’s sharp decline over the period. The weaker aussie has been supporting the Australian economy to rebalance away from the country’s overreliance on mining exports.
Record low interest rates have boosted domestic demand, which has helped sustain annual GDP growth at above 2% and bring unemployment down to 5.8% from its peak of 6.4% at the start of 2015. Meanwhile exports in the services sector have benefited from the weaker Australian dollar.
In today’s statement, the RBA sounded broadly optimistic about the performance of the Australian economy but was concerned about the developments in the global economy affecting domestic growth prospects. The RBA was also cautious about whether the improvements in employment seen in recent months would continue.
However, a bigger deciding point for future rate cuts is likely to be the outlook for inflation. Annual inflation has been running below the Bank’s target range of 2-3% since late 2014. CPI edged up to 1.7% in the fourth quarter of 2015 but with the renewed slide in oil prices and a deceleration in the aussie’s decline, inflation could yet fall back over the coming quarters and move further below the RBA’s target. RBA Governor, Glenn Stevens, said in his statement “Continued low inflation may provide scope for easier policy”.
Another potential obstacle to further rate cuts had been the housing bubble in urban areas. But Stevens noted in his statement that house prices have moderated in Sydney and Melbourne and remain subdued in other cities. This would lessen the risks from cutting rates to ultra-low levels should the RBA decide that the outlook for growth and inflation is deteriorating.
The Australian dollar briefly spiked up to 0.7128 against the US dollar just after the announcement but has since retreated to around 0.7053 in mid-European session. The aussie touched a near 7-year low of 0.6826 in January as worries grew over China’s growth prospects. China is Australia’s largest export market and a prolonged downturn would hurt the Australian dollar, which has since rebounded 3% from the low point.
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