AU: RBA Announcement

October 31, 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. This rate was cut by 25 basis points in May and August this year, in both cases soon after the release of data showing falls in headline inflation. CPI data released last week showed price pressures have remained subdued in recent months but also appear to have reassured officials that inflation is on track to return to its target range of 2.0 percent to 3.0 percent in the medium term.

The statement accompanying the RBA decision noted that global growth remains below-average, but also pointed to some stabilisation in economic conditions in China. Officials made little change to their assessment of domestic activity, noting again that an ongoing contraction in mining investment was offset by stronger residential construction, public demand and exports. Labor market indicators were again characterized as "mixed".

The statement also again noted that inflation is "quite low" and is expected to remain low "for some time". Headline CPI inflation, which had fallen from 1.7 percent to 1.3 percent and then to a 17-year low of 1.0 percent over the previous two quarters, bounced back to 1.3 percent in the three months to September. This increase was largely driven by stronger increases in food and non-alcoholic beverage prices. Measures of underlying inflation, meanwhile, were steady in the three months to September.

Ahead of more detailed forecasts to be published later this week in its quarterly Statement on Monetary Policy, the statement today noted that there has been little change in how the RBA sees the outlook for activity and prices. The economy is still expected to grow at close to its potential rate for the next year and then strengthen, while inflation is expected to pick up "gradually" over the next two years.

Although headline inflation remains well below its target range for now, the fact that the RBA expects it will move higher over the medium term suggests it is less likely to cut policy rates compared with earlier this year, when headline inflation was falling. Officials have stressed that they have a patient and "flexible" approach to meeting their inflation target. This suggests that policy rates are likely to remain on hold for the time being, although any significant appreciation of the local currency may prompt renewed consideration of additional rate cuts.

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.