AU: RBA Announcement

October 3, 2016 10:30 CDT

Consensus Actual Previous
Change 0bp 0bp 0bp
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. Today's meeting is the first chaired by newly-appointed Governor Philip Lowe, who took over last month and who has indicated that he will retain the RBA's medium-term focus for returning inflation to its target range. Inflation data to be published later this month will play a key role in determining whether any changes to policy settings will be considered at next month's meeting.

The statement accompanying the RBA's decision today was broadly similar to last month's, indicating that the change in leadership has not significantly changed the assessment of economic conditions. The statement noted that global growth is below-average, reflecting a moderation in Chinese growth. Officials also pointed to "moderate" growth in the domestic economy, with an ongoing contraction in mining investment offset by stronger residential construction, public demand and exports. Household consumption was described as growing at a "reasonable" pace but officials noted signs that it has slowed recently.

Labor market indicators were characterised as "mixed" but generally indicating continued job growth in the near term. The statement again noted that inflation is "quite low" and likely to stay that way "for some time". Officials again cautioned that an appreciating exchange rate could complicate necessary adjustments to the economy.

The decision to leave policy rates unchanged today was widely anticipated. Both rate cuts this year - in August and May - occurred at the policy meeting immediately after the publication of the quarterly CPI report, with officials clearly preferring to have up-to-date inflation data at hand before making a change to policy settings.

The CPI report for the three months to September will be released later this month, ahead of the next policy meeting in early November. Officials will also prepare revised growth and inflation forecasts over the next month for the RBA's quarterly Statement on Monetary Policy, to be published a few days after the November policy meeting.

Headline CPI inflation fell to a 17-year low of 1.0 percent in the three months to June, and has been below the RBA's target range of 2 to 3 percent since mid-2014. Persistent strength in the Australian dollar is helping to contain domestic price pressures, but solid growth, low unemployment and recent increases in key export prices may strengthen officials' confidence that inflation will return back towards target over the medium-term.

This suggests that the RBA may keep rates on hold for the next few months at least. The RBA has been patient in setting policy to get inflation back to target and it appears that Governor Lowe will continue this approach. This preference to have a medium-term focus for meeting the target was also recently confirmed in the updated agreement between the RBA and the government on the framework for monetary policy. Markets, however, continue to price in a strong chance of another rate cut early in the new year.

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.