AU: RBA Announcement

September 5, 2016 11:30 CDT

Consensus Actual Previous
Change 0bp 0bp -25bp
Level 1.50% 1.50% 1.50%

The Reserve Bank of Australia left its key interest rate unchanged at 1.50 percent, in line with consensus expectations. This rate was cut by 25 basis points at the RBA's previous policy meeting in early August, following a similar cut in May. Today's meeting is the last chaired by outgoing Governor Glenn Stevens, with his replacement, Deputy Governor Philip Lowe, set to take over later this month.

The statement accompanying the RBA decision noted global growth is below-average, reflecting an apparent moderation in Chinese growth. It noted continuing domestic growth, with weaker business investment offset by stronger activity elsewhere. GDP data for the three months to June are scheduled for publication Wednesday this week and are expected to show a fall in quarter-on-quarter growth compared to the 1.1 percent growth recorded in the three months to March.

Officials described inflation as "quite low" and expect this to remain the case for some time. They also noted that low policy rates are helping to support the economy but again warned that any appreciation of the exchange rate could complicate necessary adjustments to the economy.

Having cut rates twice so far this year, it appears that the RBA's bias remains in favor of further policy easing. This preference partly reflects officials' concerns about the strength of the local currency. However, both cuts made this year have been at the meetings immediately following the release of quarterly inflation data that showed weaker-than-expected price pressures.

This suggests that Lowe may prefer to leave policy on hold when he chairs his first meeting next month. He may instead consider another rate cut at the November meeting, after the release of inflation data for the three months to September, scheduled for late October. Inflation fell to a 17-year low of 1.0% in the three months to June, well below the RBA's target range of 2 to 3 percent.

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.

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.