AU: RBA Announcement


Mon Mar 02 21:30:00 CST 2015

Consensus Actual Previous
Change -25bp 0bp -25bp
Level 2.0% 2.25% 2.25%

Highlights
The Reserve Bank of Australia kept its key interest rate at 2.25 percent many analysts were expecting another 25 basis point interest rate cut to follow February's 25 basis point reduction. According to Governor Glenn Stevens' statement, the "Board judged that, having eased monetary policy at the previous meeting, it was appropriate to hold interest rates steady for the time being. Further easing of policy may be appropriate over the period ahead, in order to foster sustainable growth in demand and inflation consistent with the target. The Board will further assess the case for such action at forthcoming meetings."

The Board continued to press for a lower exchange rate for the Australian dollar. It noted again that the currency "has declined noticeably against a rising U.S. dollar, though less so against a basket of currencies. It remains above most estimates of its fundamental value, particularly given the significant declines in key commodity prices. A lower exchange rate is likely to be needed to achieve balanced growth in the economy."

The Board noted that the economy is continuing to grow below trend with domestic demand weak. This has resulted in a gradually increasing unemployment rate. It said that the economy will continue to operate with spare capacity for some time. "With growth in labour costs subdued, it appears likely that inflation will remain consistent with the target over the next one to two years, even with a lower exchange rate." Dwelling prices continue to rise strongly in Sydney, though trends have been more varied in a number of other cities over recent months.

Definition
The central bank of Australia announces its monetary policy with regard to interest rates on the first Tuesday of each month with the exception of January.

Description
The Reserve Bank of Australia's (RBA's) main responsibility is monetary policy. Policy decisions are made by the Reserve Bank Board with the objective of achieving low and stable inflation over the medium term. Other responsibilities include maintaining financial system stability, while at the same time promoting the safety and efficiency of the payments system. The RBA regards appropriate monetary policy as a major factor contributing to the Australian dollar's stability, which in turn leads to full employment and the economic prosperity for Australia.

The RBA is unique among the central banks - it has two boards with complementary responsibilities. The Reserve Bank Board is responsible for monetary policy and overall financial system stability. The Payments System Board has specific responsibility for the safety and efficiency of the payments system.

The RBA sets an interest rate at which it lends to financial institutions. This interest rate then affects the whole range of interest rates set by commercial banks and other institutions for their own savers and borrowers. It also tends to affect the price of financial assets, such as bonds and shares, and the exchange rate, which affect consumer and business demand in a variety of ways. Lowering or raising interest rates affects spending in the economy.

The level of interest rates affects the economy. Higher interest rates tend to slow economic activity; lower interest rates stimulate economic activity. Either way, interest rates influence the sales environment. In the consumer sector, few homes or cars will be purchased when interest rates rise. Furthermore, interest rate costs are a significant factor for many businesses, particularly for companies with high debt loads or who have to finance high inventory levels. This interest cost has a direct impact on corporate profits. The bottom line is that higher interest rates are bearish for the financial markets, while lower interest rates are bullish.