As universally expected, the RBA kept its key interest rate at 2.0 percent. The Bank had previously lowered its interest rate by 25 basis points in February and in May. In its communications, the RBA has continued to highlight comfort with its current monetary stance.
In his statement, Governor Glenn Stevens noted that financial conditions will inform if current policy stance to foster growth. The expected that the economy would operate with some spare capacity for a time. The statement noted that growth is below the long term average but employment was stronger. Equity market volatility has continued, but the functioning of financial markets generally has not, to date, been impaired. Long-term borrowing rates for most sovereigns and creditworthy private borrowers remain remarkably low. Overall, global financial conditions remain very accommodative.
The RBA also kept 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.
Recent economic data has been positive. Retail spending has held up, and in August the unemployment rate fell slightly to 6.2 per cent, with more jobs added than economists were expecting.
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.