As expected, the RBA Board left its interest rate unchanged at 2.0 percent for the 7th consecutive month. The Bank lowered rates in Feb and May, taking the cash rate to 2.00 percent from 2.50 percent, having been on hold since Aug 2013. It has since been in 'watch and see mode' assessing the impact of these moves. It noted that the Australian dollar is adjusting to the significant declines in key commodity prices. It also noted that these prices are lower when compared with a year ago on supply and weaker demand. The RBA thought that the prospect for economic improvement firmed in recent months.
The RBA has explicitly stated that low inflation may provide scope to lower rates if needed to further support demand. However, the Bank's current views on demand do not appear to give much of a case for more easing. The RBA retained its 3 percent growth forecast for 2016 in its November statement. It also stated that it expected the unemployment rate to hold steady before eventually declining in late 2017.
In the Q&A following a dinner presentation on November 24 governor Glenn Stevens noted that he was prepared to cut rates: "I am more than content to lower rates if that actually helps". However, the governor also indicated that he expected that signalling a period of stability and pointing out the positive developments in the economy might have a more constructive impact on confidence and growth than lowering rates.
The RBA takes off for its summer vacation in January and will meet again on February 2.
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.