Australia: RBA keeps rates at record low in December
December 1, 2015
The Reserve Bank of Australia (RBA) left the cash rate unchanged at 2.00% at its 1 December Board Meeting, the last policy meeting of the year. The decision was in line with market expectations. The cash rate has been kept at its current level since the Bank’s decision to cut the rate to the current record low on 5 May.
In this month’s accompanying statement, the RBA reiterated that globally, growth is moderate, with some Asian economies demonstrating weakness. Commodity prices remain low, which has affected key Australian exports, resulting in deteriorating terms of trade. Regarding monetary policy, most major central banks are maintaining an accommodative policy stance, with the exception of the Fed, which is expected to start unwinding its multi-year easing cycle soon. In general, credit costs across the world are still relatively very low.
Australia is adjusting to the decrease in demand for resources and investment is falling accordingly, particularly in the mining sector. The decline in investment spending has impacted GDP growth, causing it to fall to levels below the historical average. However non-mining sector growth is picking up, according to recent business surveys.
In the monetary sector, inflation remains modest thanks to excess capacity in the economy, as well as low energy prices. The RBA noted the inflation is expected to be within the 2.0%–3.0% target range for the next two years. The current low interest rate environment has helped boost lending, although residential borrowing has eased thanks to new regulations in the housing market. In previous statements, the RBA has warned of an overheated housing market in some Australian regions; however, in its December statement, it noted that these risks have been ameliorated as house prices have eased in key markets. As for the Australian dollar, it is still resting at low levels that has given Australian exporters a helping hand.
The policy meeting came shortly after Q3 GDP data was released. Reserve Bank Governor Glenn Stevens expressed some optimism at the result, stating that the economy was likely to continue at a steady but moderate pace. The governor also adopted a stabilizing tone in his statement, saying “economic conditions had firmed a little over recent months and that leaving the cash rate unchanged was appropriate.” Governor Stevens also left the option open for further easing if the outlook for inflation alters from its prescribed path. The next board meeting is scheduled for 2 February.
Author: Robert Hill, Economist