The Age / Business Day:
The Reserve Bank of Australia has kept official interest rates on hold at 2 per cent, choosing to wait and see if recent global financial markets turmoil and a slowdown in China will affect the domestic economy.
In the statement accompanying the decision, RBA governor Glenn Stevens left the door open for further monetary easing but also remained optimistic about the local economy.
“Over the period ahead, new information should allow the Board to judge whether the recent improvement in labour market conditions is continuing and whether the recent financial turbulence portends weaker global and domestic demand,” Mr Stevens said.
“Continued low inflation may provide scope for easier policy, should that be appropriate to lend support to demand.”
While the wording suggests the next move by the RBA is more likely to be a cut than a hike, some observers had expected the central bank to clearly signal its intent to ease in the near future.
The Australian dollar immediately jumped by US0.2¢ to the day’s high of US71.29¢ on the decision, before just as quickly losing its gains to trade at US71.09¢.
Unlike many statements in the past year, the RBA didn’t state it was concerned about the current level of the currency, just noting that “the exchange rate has continued its adjustment to the evolving economic outlook”.
The currency strengthened last week after the Bank of Japan stunned markets by introducing negative interest rates.
Today’s statement suggests that Mr Stevens is not as “chilled out” as he was before Christmas, said Capital Economics chief Australia economist Paul Dales.
“In fact, growing concerns over the health of China’s economy and the recent falls in domestic equity prices appears to have left Stevens feeling the summer heat,” he said.
The RBA noted that “China’s growth rate has continued to moderate” and that “financial markets have once again exhibited heightened volatility”.
But Mr Dales conceded it didn’t appear as though the fresh worries had led the RBA to revise down its forecasts for the performance of the Australian economy.
“We will know more when the new forecasts are published in Friday’s Statement on Monetary Policy,” he said, adding that the chances are rising that an overseas slowdown will prevent economic growth in Australia from accelerating this year, as the RBA is expecting.
CBA chief economist Michael Blythe said that while the RBA’s policy setting remained biased towards further easing, one of the conditions for another rate cut was now to see if what’s happening overseas impacts Australia.
“They sound more upbeat on the domestic economy … but the rest of the world, we need to wait and see just how that story plays out over the next few months.”