AU: RBA Announcement


Mon Jul 31 23:30:00 CDT 2017

Consensus Actual Previous
Change 0bp 0bp 0bp
Level 1.5% 1.5% 1.5%

Highlights
The Reserve Bank of Australia has again left its main policy rate unchanged at a record-low 1.50 percent, in line with the consensus forecast. This rate was last changed in August last year, when it was cut by 25 basis points. The RBA will publish updated growth and inflation forecasts later in the week.

The statement accompanying today's decision notes that conditions in the global economy are continuing to improve while again pointing to risks to the outlook for Chinese growth. Ahead of the publication of revised forecasts the statement advises that the RBA's assessment of the economic outlook is "largely unchanged". The economy is still expected to grow at an annual pace of around 3.0 percent over the next couple of years while the unemployment rate is forecast to decline "a little". Officials, however, believe wage growth will remain subdued, underpinning their forecast for inflation to pick up only "gradually".

The main change in economic conditions that has taken place since the RBA's last meeting at the start of July has been a sharp appreciation of the local currency. After officials had previously noted that a stronger currency would "complicate" adjustment in the domestic economy, today's statement highlights that this development represents a downside risk for both the inflation and growth outlook.

The minutes for the RBA's July meeting showed there had been a discussion about the current level of policy rates, which were described as "clearly expansionary". This suggested that the policy rate would need to increase if and when officials decide that a more neutral policy stance is warranted. The subsequent shift in the exchange rate, however, suggests that officials are less likely to make such a decision in the near term, with today's statement again noting the support low interest rates are providing to the domestic economy.

Definition
The Reserve bank of Australia (RBA) announces its monetary policy with regard to interest rates on the first Tuesday of each month with the exception of January when it is on vacation. The RBA is the central bank of Australia and its duty is to contribute to the stability of the currency, full employment, and the economic prosperity and welfare of the Australian people. It does this by setting the cash rate to meet an agreed medium-term inflation target, working to maintain a strong financial system and efficient payments system.

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.