The Reserve Bank of Australia (RBA), which has cut its rate twice this year by a total of 50 basis points, said due to last month's rate cut it was appropriate to leave the rate steady today.
RBA Governor Glenn Stevens said Australia's economy was likely to continue to have spare capacity for some time and during such circumstances monetary policy needs to be accommodative to support borrowing and spending.
With the economy operating below full capacity and slow growth in labour costs, inflation is forecast to remain consists with the RBA's target over the next one to two years, even with a lower exchange rate, Stevens said.
Australia's consumer price inflation eased to 1.3 percent in the first quarter, down from 1.7 percent in the fourth quarter, and below the RBA's target of 2 to 3 percent.
Australia's Gross Domestic Product rose by 0.5 percent in the fourth quarter of 2014 from the third quarter for annual growth of 2.5 percent, slightly down from 2.7 percent expansion in both the third and second quarters, but well below 3.5 percent in the first quarter.
The unemployment rate rose to 6.2 percent in April from 6.1 percent in March but was unchanged from 6.2 percent in February.
Since mid-May the Australian dollar, known as the aussie, has resumed declining after strengthening in April on expectations that the RBA may have ended its easing cycle. Today the aussie was trading around 1.31 to the U.S. dollar for a drop of 6.8 percent since the start of the year, and a level not seen since 2009.
The Reserve Bank of Australia issued the following statement by its governor, Glenn Stevens:
"At its meeting today, the Board decided to leave the cash rate unchanged at 2.0 per cent.
The global economy is expanding at a moderate pace, but some key commodity prices are much lower than a year ago. This trend appears largely to reflect increased supply, including from Australia. Australia's terms of trade are falling nonetheless.
The Federal Reserve is expected to start increasing its policy rate later this year, but some other major central banks are continuing to ease policy. Hence, global financial conditions remain very accommodative. Despite some increases in bond yields recently, long-term borrowing rates for sovereigns and creditworthy private borrowers remain remarkably low.
In Australia, the available information suggests the economy has continued to grow, but at a rate somewhat below its longer-term average. Household spending has improved, including a large rise in dwelling construction, and exports are rising. But a key drag on private demand is weakness in business capital expenditure in both the mining and non-mining sectors and this is likely to persist over the coming year. Public spending is also scheduled to be subdued. Overall, the economy is likely to be operating with a degree of spare capacity for some time yet. With very slow growth in labour costs, inflation is forecast to remain consistent with the target over the next one to two years, even with a lower exchange rate.
In such circumstances, monetary policy needs to be accommodative. Low interest rates are acting to support borrowing and spending. Credit is recording moderate growth overall, with stronger lending to businesses and growth in lending to the housing market broadly steady over recent months. Dwelling prices continue to rise strongly in Sydney, though trends have been more varied in a number of other cities. The Bank is working with other regulators to assess and contain risks that may arise from the housing market. In other asset markets, prices for equities and commercial property have been supported by lower long-term interest rates.
The Australian dollar has declined noticeably against a rising US dollar over the past year, though less so against a basket of currencies. Further depreciation seems both likely and necessary, particularly given the significant declines in key commodity prices.
Having eased monetary policy last month, the Board today judged that leaving the cash rate unchanged was appropriate at this meeting. Information on economic and financial conditions to be received over the period ahead will inform the Board's assessment of the outlook and hence whether the current stance of policy will most effectively foster sustainable growth and inflation consistent with the target."
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