AU: RBA Announcement

February 6, 2017 09:30 CST

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

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 last year, when it was cut by 25 basis points. The RBA's next scheduled policy meeting will be held early next month.

The statement accompanying today's decision notes that conditions in the global economy have improved in recent months, supported by stronger growth in China. This, in turn, has pushed global commodity prices higher and provided a significant boost to Australia's national income. Officials expect this will help drive a rebound in domestic growth in the three months to December, after weaker-than-expected growth in the three months to September. They also retain their forecast for the economy to grow by around 3 percent over the next couple of years, reflecting not only their view that exports will strengthen further but also an expectation that large declines in mining investment will moderate. Officials' assessment of the labour market outlook is little changed, with continued expansion in employment anticipated.

There is also little change in the RBA's inflation outlook. CPI data published last month for the three months to December showed headline inflation increasing to 1.5 percent, up from 1.3 percent in the three months to September, but still below the RBA's target range of 2.0 percent to 3.0 percent. Officials expect price pressures will remain subdued "for some time", largely reflecting weak growth in labour costs, but forecast headline inflation to rise above 2.0 percent over the course of 2017 and for underlying inflation also to pick up, albeit more gradually.

Based on this growth and inflation outlook, the RBA again concluded that the policy rates already delivered last year remain sufficient for now. Although below-target inflation suggests that the potential for additional rate cuts remains, the boost to the domestic economy provided by higher global commodity prices may be enough to keep policy settings on hold at least for a few more months. The RBA will publish a more detailed assessment of current and projected economic conditions in its quarterly Statement on Monetary Policy later this week.

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.