- POSTED: 02 Sep 2014 15:38
- UPDATED: 02 Sep 2014 15:39
Australia's central bank kept interest rates on hold at a record low 2.5 per cent on Tuesday (Sep 2) as it flagged an accommodative monetary policy and stepped up its rhetoric against the local dollar.
SYDNEY: Australia's central bank kept interest rates on hold at a record low 2.5 per cent on Tuesday (Sep 2) as it flagged an accommodative monetary policy and stepped up its rhetoric against the local dollar. The Reserve Bank of Australia said it was prudent to maintain a "period of stability in interest rates" to support demand and growth in the economy as it shifts away from a dependence on mining.
"In the board's judgement, monetary policy is appropriately configured to foster sustainable growth in demand and inflation outcomes consistent with the target," governor Glenn Stevens said in a statement. "On present indications, the most prudent course is likely to be a period of stability in interest rates."
The central bank's decision to leave the cash rate unchanged was widely expected by economists and financial markets, although it sounded a slightly more optimistic note on domestic growth.
"While the RBA's overall broad messages were little changed, there were a few shifts in tone," UBS senior economist George Tharenou said. "They were more upbeat on aspects of the domestic economy - specifically by acknowledging improved business conditions and consumer sentiment, non-mining (capital expenditure) intentions, and continued rises in house prices."
The Australian dollar was mostly steady following the decision, lifting slightly above 93 US cents. The monthly statement came a day before the release of June quarter GDP figures. Economists forecast a sharp slowdown in growth after a strong 1.1 per cent reading in the first-quarter on the back of a jump in exports.
DOLLAR "ABOVE FUNDAMENTAL VALUE"
The RBA lifted its criticism of the dollar's continued strength against its US counterpart, which analysts said has dampened the recovery in non-mining sectors of the economy. "The exchange rate, on the other hand, remains above most estimates of its fundamental value, particularly given the declines in key commodity prices," Stevens said. "It is offering less assistance than would normally be expected in achieving balanced growth in the economy."
The slight ramping up in rhetoric, while still restrained, was the strongest by the central bank since it actively talked down the currency in late 2013 and described it as "uncomfortably high". Despite the shift in language about the exchange rate, Deutsche Bank senior economist Phil O'Donaghoe told AFP the central bank's overall assessment about the economy remained unchanged.
"The RBA probably would be happier with a currency that's a bit lower, but perhaps there isn't a huge amount that they can do about it," O'Donaghoe said. "I think we're all, the RBA included, sitting back waiting for the US dollar to strengthen in a persistent way."
The Reserve Bank said the jobs market had a "degree of spare capacity" as it acknowledged a spike in the unemployment rate to a 12-year high of 6.4 per cent in July. But it added that there have been "some improvement" in other labour market indicators. It noted that resources investment was starting to decline significantly, while non-mining investment would "see only moderate growth in the near term".
The central bank added that weakening property markets in China - Australia's largest trading partner - would be a "challenge" to its growth in the short-term. Australia is transiting away from an unprecedented boom in the mining sector, with rates on hold at 2.5 per cent for more than a year to stimulate growth in non-resources industries.