AU: RBA Announcement

December 5, 2016 09:30 CST

Consensus Actual Previous
Change 0bp 0bp 0bp
Level 1.5% 1.5% 1.50%

The Reserve Bank of Australia has 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, when it was cut by 25 basis points. The RBA's next scheduled policy meeting will be held in February 2017.

The statement accompanying today's decision differs in some ways to that published after the last meeting at the start of November. The global economy was again described as growing at a lower than average pace, but the inflation outlook is now considered to be more "balanced" than it has been previously. Officials also referred to the increase in government bond yields that has taken place along with yields elsewhere after the U.S. presidential election, but this adjustment was characterised as "orderly".

The RBA's assessment of domestic growth has been adjusted slightly. Previously the economy was said to be growing at a moderate pace, but now officials are noting more explicitly that they expect growth to slow in the near-term before picking up again. Officials have also placed more emphasis this month on the economy's transition from the previous mining boom, noting the "subdued" outlook for business investment but also the prospect of stronger export performance.

These changes in the discussion of the growth outlook come just before the release of GDP data for the three months to September, scheduled for release tomorrow. The consensus forecast is that GDP growth slowed to 0.2 percent quarter-on-quarter, down from 0.5 percent in the three months to June, while year-on-year growth is tipped to have slowed from 3.3 percent to 2.5 percent. Some forecasters, however, expect the data will show that GDP fell on the quarter. By noting in today's statement that near-term growth is likely to slow, officials have signalled that this is already factored into their decision to keep policy on hold today.

There is little change in officials' assessment of the housing market and the labour market, with the latter again described as "mixed" and driven by part-time employment. Similarly, officials again noted that inflation remains "quite low" and is expected to stay low "for some time", though this month's statement added that inflation is expected to return to more normal levels.

With growth set to slow but the RBA expecting inflation to pick up, the outlook for policy rate changes in 2017 seems finely balanced. For now, investors are pricing in some chance of another rate cut early in the year, but expectations of a possible rate hike later in the year are also building. When the RBA holds its next policy meeting in early February it will have had time to assess the impact of an expected increase in U.S. policy rates later this month, as well as inflation data for the three months to December, scheduled for release in late January.

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.