Australia holds rate, repeats will adjust to growth, inflation

    Australia's central bank held its cash rate steady at 2.5 percent, as expected, and repeated that it would "continue to assess the outlook and adjust policy as needed to foster sustainable growth in demand and inflation consistent with the target."
    The policy guidance was the same as The Reserve Bank of Australia (RBA) gave last month when it cut its rate for the second time this year, indicating that the central bank has adopted a neutral policy stance. In previous months, the RBA had said that it had scope to adjust policy, but this phrase is no longer used.
   The RBA, which has cut rates by 50 basis points this year and by 225 points since November 2011, also repeated last month's statement that the Australian dollar "remains at a high level" although it has depreciated by around 15 percent since early April and it is "possible that the exchange rate will depreciate further over time, which would help to foster a rebalancing of growth in the economy."
    The RBA said rate cuts since late 2011 had supported interest-sensitive spending and asset values and further effects can be expected over time. The pace of borrowing has remained relatively subdued, though recently there are signs of increased demand for finance by households.
    The A$, which had been above parity to the U.S. dollar most of the time since early 2011, started to weaken in early May in response to the RBA's first rate cut and was trading below 0.90 cents to the U.S dollar earlier today, down some 13 percent since the beginning of the year.

    Economic growth in Australia has been hit by a slowdown in China's imports of raw materials and the RBA said below-trend growth is expected to continue in the near term as the economy adjusts to lower mining investment.
    Australia's Gross Domestic Product grew by 0.6 percent in the first quarter from the previous quarter for annual growth of 2.5 percent, down from 3.1 percent in the four and third quarters.    Australia's unemployment rate has also moved higher while inflation remains consistent with the RBA's target of 2-3 percent.
    "With growth in labour costs moderating, this is expected to remain  the case over the next one to two years, even with the effects of the recent depreciation of the exchange rate," the RBA said about inflation.

    Australia's inflation rate was 2.4 percent in second quarter, slightly below the first quarter's 2.5 percent but up from the fourth quarter's 2.2 percent.

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