The Reserve Bank of Australia left its key cash rate at 2.25 percent where it has been since February. Most analysts thought they would lower its rate by 25 basis points to 2.0 percent. However, in its statement, the RBA said that further easing may be appropriate over the period ahead and will assess the case for easing at upcoming meetings.
It noted that a further decline in the Australian dollar seemed likely given the drop in commodity prices. It also said that dwelling prices continue to increase strongly in Sydney. However, inflation to remain within the target range of between 2 percent and 3 percent even with the lower AUD.
The news ends weeks of fevered speculation about which way the RBA would jump with analysts and economists sharply divided. Australia continues to grapple with an economic slowdown as commodity prices fall and mining investment wanes.
Many central banks around the world are in an easing cycle in a bid to spur economic growth. Countries whose central banks which have cut their benchmark rates since the beginning of the year include China, India, and Russia.
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.
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.