As generally predicted, the Reserve Bank of Australia announced that the cash rate would remain unchanged at 3.50 per cent.
The RBA subsequently released a comprehensive statement compiled by Governor Glenn Stevens regarding the Monetary Policy Decision.
The statement commented on the global situation and particularly the softening economy, stating ‘Current assessments are that global GDP will grow at no more than average pace in 2012, with risks to the outlook still on the downside.’
Limited growth in the U.S. over recent months was alluded to, as was the contraction of European economic activity. It was also asserted that recent months have seen financial markets respond well to progress made in confronting Europe’s deep financial difficulties and that ‘expectations for further progress are high’.
Particular mention was made of the situation in China, Australia’s biggest trading partner. The statement explained that for the first half of 2012 growth in the eastern nation remained ‘reasonably robust’ but went on to acknowledge that the most recent data had proven conditions to be faltering slightly which has increased ‘uncertainty about near-term growth’. It was also added that ‘Around Asia generally, growth is being dampened by the more moderate Chinese expansion and the weakness in Europe.’
Perhaps surprisingly, no direct comment was made on the sharp drop in iron ore prices, a broader summary of the situation was all that was offered: ‘Some commodity prices of importance to Australia have fallen sharply in recent weeks.’
This was the statement’s overview of Australia’s economic circumstances: ‘In Australia, most indicators available for this meeting suggest growth has been running close to trend, led by very large increases in capital spending in the resources sector. Consumption growth was also quite firm in the first half of the year, though some of that strength was temporary. Labour market data have shown moderate employment growth, even with job shedding in some industries, and the rate of unemployment has thus far remained low. Inflation remains low, with underlying measures near 2 per cent over the year to June, and headline CPI inflation lower than that. The introduction of the carbon price is starting to affect consumer prices in the current quarter, and this will continue over the next couple of quarters. The Bank’s assessment is that inflation will be consistent with the target over the next one to two years. Maintaining low inflation will, however, require growth in domestic costs to remain contained as the effects of the earlier exchange rate appreciation wane.’
The RBA acknowledged the declining exchange rate seen in the last couple of months but maintained that given the global slowdown and dropping export prices this decline was not as bad as expected.
The RBA also stressed that changes made earlier in the year (the cash rate was cut from 4.75 per cent in November to 3.5 per cent in June) were still in the process of melding with the economy, which was why borrowers were currently experiencing an interest rate below their medium-term averages. In terms of positive progress increased business credit and steadying housing prices were mentioned.
With Australian growth predicted to be on trend and inflation close to target, the board of the RBA felt that their decision to leave rates unchanged was the most fitting given the worsening global outlook.
It seems that the RBA intends to wait to see what effect its last rate cut will have and how the situation in Europe will develop before taking any further action.
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