As expected, the Reserve Bank of Australia kept its key interest rate at 2 percent after cutting it both in February and May. In May when the RBA cut by 25 basis points it gave no guidance regarding future policy. The Board said that after easing in May, it judged that leaving the cash rate unchanged was appropriate. Information on economic and financial conditions to be received going forward will let the Board assess the outlook and whether the current stance of policy will most effectively foster sustainable growth and inflation consistent with the target.
Regarding the Australian dollar, it noted that it has declined especially against a rising US dollar over the past year, but less so against a basket of currencies. Further depreciation seems both likely and necessary, particularly given the significant declines in key commodity prices.
The Board noted that the economy is likely to operate with spare capacity for some time to come thanks to subdued government spending. A key drag on private demand currently is weakness in CAPEX in both mining and non-mining sectors and is likely to persist over the next year. Key economic data including first quarter GDP and April retail sales and merchandise trade will be released later this week.
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.
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