Australia holds rate but less confident about growth

    Australia's central bank maintained its benchmark cash rate at 2.0 percent, as expected, and reiterated that it can still cut rates if needed to improve demand due to continued low inflation.
    But the Reserve Bank of Australia (RBA) appeared to turn less confident about future economic growth, saying it "judged that there were reasonable prospects for continued growth" compared with its statement from November when it said that the "prospects for an improvement in economic conditions had firmed a little."
    "Over the period ahead, new information should allow the Board to judge whether the recent improvement in labour market conditions is continuing and whether the recent financial turbulence portends weaker global and domestic demand," RBA Governor Glenn Stevens said.
    The RBA acknowledged that a number of emerging market economies were now faced with more difficult conditions as commodity prices, especially oil, have declined further in light of slower growth in demand and a very substantial increase in supply.
    As an exporter of many mined commodities, such as iron ore, gold and coal, Australia has been hit by the fall in such prices but Stevens said the expansion in non-mining parts of the economy had strengthened last year even as the contraction in mining investment continued.
    Australia's economy expanded by 0.9 percent in the third quarter from the second for annual growth of 2.5 percent, up from 1.9 percent in the second quarter while the unemployment rate was steady at 5.8 percent from November to December, the lowest since May 2014.
    In contrast to November, when Stevens said that the exchange rate of the Australian dollar had adjusted to the fall in commodity prices, today he merely said that it had adjusted to the evolving economic outlook.
    The Australian dollar started falling in September 2014 and depreciated by 11 percent against the U.S. dollar in 2015. But since August it has been more steady and was trading at 1.41 to the U.S. dollar today, down from yesterday's close and down almost 3 percent since the start of this year.
    Australia's inflation rate rose slightly to 1.7 percent in the fourth quarter of last year from 1.5 percent in the two previous quarters and the RBA expects inflation to remain low over the next year or two in light of subdued labour costs and restrained inflation worldwide.


    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.

Recent information suggests the global economy is continuing to grow, though at a slightly lower pace than earlier expected. While several advanced economies have recorded improved growth over the past year, conditions have become more difficult for a number of emerging market economies. China's growth rate has continued to moderate.

Commodity prices have declined further, especially oil prices. This partly reflects slower growth in demand but also very substantial increases in supply over recent years. The decline in Australia's terms of trade, which began more than four years ago, has therefore continued.

Financial markets have once again exhibited heightened volatility recently, as participants grapple with uncertainty about the global economic outlook and diverging policy settings among the major jurisdictions. Appetite for risk has diminished somewhat and funding conditions for emerging market sovereigns and lesser-rated corporates have tightened. But funding costs for high-quality borrowers remain very low and, globally, monetary policy remains remarkably accommodative.

In Australia, the available information suggests that the expansion in the non-mining parts of the economy strengthened during 2015 even as the contraction in spending in mining investment continued. Surveys of business conditions moved to above average levels, employment growth picked up and the unemployment rate declined in the second half of the year, even though measured GDP growth was below average. The pace of lending to businesses also picked up.

Inflation continues to be quite low, with the CPI rising by 1.7 per cent over 2015. This was partly caused by declining prices for oil and some utilities, but underlying measures of inflation are also low at about 2 per cent. With growth in labour costs continuing to be quite subdued as well, and inflation restrained elsewhere in the world, consumer price inflation is likely to remain low over the next year or two.

Given these conditions, it is appropriate for monetary policy to be accommodative. Low interest rates are supporting demand, while regulatory measures are working to emphasise prudent lending standards and so to contain risks in the housing market. Credit growth to households continues at a moderate pace, albeit with a changed composition between investors and owner-occupiers. The pace of growth in dwelling prices has moderated in Melbourne and Sydney over recent months and has remained mostly subdued in other cities. The exchange rate has continued its adjustment to the evolving economic outlook.

At today's meeting, the Board judged that there were reasonable prospects for continued growth in the economy, with inflation close to target. The Board therefore decided that the current setting of monetary policy remained appropriate.

Over the period ahead, new information should allow the Board to judge whether the recent improvement in labour market conditions is continuing and whether the recent financial turbulence portends weaker global and domestic demand. Continued low inflation may provide scope for easier policy, should that be appropriate to lend support to demand."

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