Australia’s central bank left its benchmark cash rate steady at 1.0 percent, as expected, and said it would “ease monetary policy further if needed to support economic growth and the achievement of the inflation target.”
The Reserve Bank of Australia (RBA), which cut its cash rate in June and July by a total of 50 basis points, also lowered its outlook for inflation to “be a little under 2 percent over 2020” as compared with its forecast from last month that inflation would be “around” 2 percent in 2020.
For 2021 RBA still expects inflation to be a little above 2.0 percent. The RBA targets inflation of 2.0 to 3.0 percent and in July Australia’s inflation rate rose to 1.6 percent from 1.3 percent.
In today’s statement, the RBA board is transparent and open about its willingness to lower rates further, a departure from last month when it said it was willing to “adjust monetary policy if needed.”
In addition to lowering its outlook for inflation, the RBA echoed Governor Philip Lowe’s speech from last month in Sydney that was widely seen as a the first use of “forward guidance” by the RBA.
“It is reasonable to expect that an extended period of low interest rates will be required in Australia to make progress in reducing unemployment and achieve more assured progress towards the inflation target,” the RBA said today.
In his speech on July 25, Lowe also said “it is reasonable to expect an extended period of low interest rates” whether of not further monetary easing is needed.
Following the 2007-2009 Global Financial Crises when interest rates were slashed to essentially zero, central banks such as the Federal Reserve, the Bank of England and the European Central Bank began employing forward guidance as a regular part of their monetary tool box.
By signaling the likely course of future monetary policy to financial markets and businesses, central banks increased the transparency and thus efficiency of their monetary policy.
In its commentary on the global economy, the RBA reiterated that the outlook “remains reasonable,” but the risks remain tilted to the downside due to uncertainty from trade and technology disputes that are affecting investments.
RBA also acknowledged that economic growth in Australia has been lower than it had expected in the first half of this year but it expects growth to strengthen from here, with the central scenario for the country’s economy to grow around 2.4 percent this year and 2.75 percent in 2020, supported by low interest rates, recent tax cuts, spending on infrastructure, a brighter outlook for the resources sector and signs of stabilization in the housing market.
In the first quarter of this year Australia’s gross domestic product grew by 1.8 percent year-on-year, down from 2.3 percent in the previous quarter.
Australia’s dollar firmed today in response to the RBA’s statement and was trading around 1.47 to the U.S. dollar, up from 1.48 yesterday, but down 3.4 percent this year.
The Reserve Bank of Australia issued the following statement:
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