Australia’s central bank held its benchmark cash rate steady at 2.50 percent, as expected, and reiterated that “the most prudent course is likely to be a period of stability in interest rates.”
The Reserve Bank of Australia (RBA), which has maintained its rate since August 2013, said continued accommodative monetary policy should support demand and help economic growth strengthen over time while inflation is expected to remain in line with the bank’s 2 -3 percent target.
The RBA’s guidance that rates are likely to remain unchanged for some time was the same as it gave in February and earlier this month and its statement today also largely mirrored last month’s view of the prospects for Australia’s economy.
The exchange rate of the Australian dollar – known as the Aussie – is still considered “high by historical standards,” and the RBA voiced concern over the recent rise in the exchange rate following a drop over in the last year.
“The decline in the exchange rate from its highs a year ago will assist in achieving balanced growth in the economy, but less so than previously as a result of the rise over the past few months,” the RBA quoted its governor, Glenn Stevens as saying.
The Aussie weakened sharply from May through August last year, falling from around 1.05 to the U.S. dollar to 0.89 by August 30. It then gained strength through October before again falling to a low of below 0.87 to the dollar in late January this year.
But in the last two months it has started appreciating again, trading at 0.92 to the dollar earlier today.
Australia’s economy has been hit by lower demand for its resources from China and reduced investments in its mining sector and the RBA said investment spending is still set to decline significantly and there are only tentative signs of improved investments in other sectors as firms wait for more evidence of improving conditions for committing to expansion plans.
Demand for labour remains weak and the RBA expects the unemployment rate, which was unchanged at 6.0 percent in February, to probably rise a little further and wage growth has declined noticeably, helping keep inflation consistent with the target, even with a lower exchange rate.
The headline inflation rate rose to 2.7 percent in the fourth quarter of 2013 while core inflation rose to 2.64 percent from 2.36 percent in the third quarter. In its latest quarterly report, the RBA forecast core inflation of 3 percent in the fiscal year ending in June and at 2.25-3.25 percent through December this year.
Australia’s Gross Domestic Product expanded by only 0.8 percent in the fourth quarter from the third for annual growth of 2.8 percent, up from 2.3 percent in the third but sharply down from rates of 3 percent and more in 2012.
But there are signs that consumer demand is picking up and housing construction is solid, with the RBA saying some indicators of business conditions and confidence have improved and exports are rising.
The RBA has forecast GDP to rise by 2.75 percent in the year to June and by 2.25-3.25 percent through December, helped by a lower exchange rate that is aiding exports.
The RBA said there were reasonable prospects for the global economy to improve this year as the U.S. economy continues to expand, the euro area has begun to recover from recession and Japan has recorded a significant pickup in growth. China’s growth is largely in line with policymakers objectives, though it may have slowed a little in early 2014.
Since embarking on its easing cycle in November 2011, the RBA has cut rates by 225 basis points, including 50 points in 2013.