Australia: RBA maintains policy rate in February
February 2, 2016
The Reserve Bank of Australia (RBA) left the cash rate unchanged at 2.00% at its 2 February Board Meeting, the first 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 China’s economy continuing to show signs of deceleration. Commodity prices have fallen further, which has affected key Australian exports, resulting in deteriorating terms of trade. Divergence in monetary policy between the U.S. and other economies, as well as uncertainty stemming from other factors, have increased volatility in financial markets. Credit accessibility for emerging economies has decreased, as investors shy away from riskier assets. Conversely, borrowing costs for high-quality debtors remain very accommodative.
Australia is adjusting to the decrease in demand for resources and investment is falling accordingly, particularly in the mining sector. However, data suggests that the non-mining sector of the economy expanded in 2015. Business conditions, employment growth, lending to businesses, and unemployment also showed signs of improving. Still, GDP growth was below average. Exporters have benefited from the depreciation of the exchange rate in 2015, although the Australian dollar gained some ground in the last months of 2015.
In the monetary sector, inflation remains modest thanks to excess capacity in the economy, as well as low energy prices. The current low interest rate environment has helped boost demand. Prudential regulations have helped to contain risks associated with an overheated housing market. The housing markets is still attracting investment; however, they are more balanced with increased own-occupiers. In previous statements, the RBA has warned of an overheated housing market in some Australian regions; however, in its February statement, it stated that growth in dwelling prices had moderated in key markets, such as Sydney and Melbourne, and is subdued in other locations.
The RBA stated that “there were reasonable prospects for continued growth in the economy, with inflation close to target.” Therefore, the Bank deemed that the current policy stances were appropriate. The next policy meeting is scheduled for 1 March.
Author: Robert Hill, Economist