As expected the RBA kept its policy interest rate unchanged at 2.0 percent. The RBA last cut rates in May, taking the benchmark interest rate to a historic low of 2 percent. It also trimmed rates in February. Australia is grappling with the end of a long commodities boom, but the central bank has to tread carefully in order to avoid further fueling the country's high house prices.
The RBA also stuck with its revised language around the Australian dollar. In its August policy statement the RBA had altered its tone on the currency quite significantly, saying it was "adjusting to the significant declines in key commodity prices" as opposed to previous language which said that "further depreciation seems both likely and necessary, particularly given the significant declines in key commodity prices." It maintained this wording today.
Economic and financial conditions will tell the Bank if its current stance is fostering growth. The RBA noted that available information suggested that a moderate economic expansion continues. However, the economy is likely to operate with some space capacity for a time. Inflation is expected to stay within the RBA's inflation bank even with the lower exchange rate. It noted the further softening in conditions in China and East Asia recently.
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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