AU: RBA Announcement


Mon Feb 29 21:30:00 CST 2016

Consensus Actual Previous
Change 0bp 0bp 0bp
Level 2.0% 2.0% 2.0%

Highlights
As anticipated, the RBA kept its cash rate unchanged at 2 percent where it has been since May 2015. The RBA cut rates twice in 2015, in February and May to stimulate the economy as it transitions from a decade of booming mining exports and high commodity prices.

The RBA said that recent information suggests that the global economy is continuing to grow, though at a slightly lower pace than earlier expected. In Australia, the available information suggests that the expansion in the non-mining parts of the economy strengthened during 2015 despite the contraction in spending in mining investment. This was reflected in improved labour market conditions. The pace of lending to businesses also picked up.

However the RBA left the door open to further easing, again stating that low inflation "would provide scope for easier policy, should that be appropriate to lend support to demand." The overall tone of their March statement was similar to that in February.

The RBA has an inflation target of between 2 and 3 percent. The Bank noted that inflation is quite low. With growth in labour costs continuing to be quite subdued as well, and inflation restrained elsewhere in the world, inflation is likely to remain low over the next year or two.

The Board judged that there were reasonable prospects for continued growth in the economy, with inflation close to target and decided that the current setting of monetary policy remained appropriate. "Over the period ahead, new information should allow the Board to judge whether the improvement in labour market conditions is continuing and whether the recent financial turbulence portends weaker global and domestic demand. Continued low inflation would provide scope for easier policy, should that be appropriate to lend support to demand.

Definition
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.

Description
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.