Tuesday, 2 August 2011

The Reserve Bank anticipates financial uncertainty ahead

Reserve Bank puts interest rates on hold despite price-inflation risks
110802 Glenn Stevens, Reserve Bank Governor, RBA
Amid the move to keep rates on hold, Glenn Stevens said "the pace of growth (in the global economy) slowed in the June quarter". Source: AFP

The Reserve Bank of Australia contemplated raising interest rates today, but held off because of political and economic uncertainty in Australia and across the world.

In a statement accompanying the decision to hold the cash rate at 4.75 per cent for August, RBA Governor Glenn Stevens said the board had started to worry about the growing rate of inflation.

While the statement said it would now be appropriate for interest rates to "exert a degree of restraint" to combat inflation, the US and European debt crises were cited as reasons for the decision to hold.

"At today's meeting, the board considered whether the recent (inflation) information warranted further policy tightening," Mr Stevens said.

"On balance the board judged that it was prudent to maintain the current setting of monetary policy, particularly in view of the acute sense of uncertainty in global financial markets over recent weeks.
"In future meetings, the board will continue to assess carefully the evolving outlook for growth and inflation."

The Australian dollar was sold off on the decision - the local currency fell from $US1.0980 before the statement was released to $US1.0929.

Equities markets have been under pressure throughout today's trading session.

In the statement, Mr Stevens said the board was aware inflation had begun to rise.

The second-quarter inflation report published last week showed a 0.9 per cent increase in both core and headline inflation rates, which beat market expectations.

The headline inflation rate stands at 3.6 per cent, while core inflation is 2.6 per cent.

Mr Stevens said the drivers of the high result for June, especially food, would begin to fall and temper inflation in the short term. "But measures that give a better indication of the trend in inflation have begun to rise over the past six months, after declining for the previous two years," he said.

"While they have, to date, remained consistent with the 2-3 per cent target on a year-ended basis, the board remains concerned about the medium-term outlook for inflation."

The Reserve Bank is expected to pare back its growth forecasts when it publishes its Statement of Monetary Policy this Friday. It said today that GDP growth in 2011 would be at "trend", indicating it expected the economy to grow by about 3 per cent.

UBS chief economist Scott Haslem said the RBA appeared ready to raise interest rates, but the next move would depend on global financial conditions.

"The RBA left the cash rate unchanged today, as we expected, and has signalled a tightening bias is back in play," he said. "But at the same time, it's clear that the RBA's increasing degree of discomfort about the inflation outlook, in particular higher than expected inflation outcomes and poor productivity, are for now being 'held back' by less certainty about the global picture and increased evidence that financial conditions domestically are tighter than normal."

Treasurer Wayne Swan said the decision to leave rates on hold would be a welcome relief for struggling families and businesses.

“Of course if you are struggling with cost-of-living pressures, every dollar counts,” he said in Sydney. Mr Swan also cautiously welcomed an agreement reached between the US Congress and President Barack Obama to raise the US debt ceiling.

But he said Europe and the US still had a “very painful period of economic adjustment ahead”.

Mr Swan said the recent Australian summer natural disasters, global economic instability and a strong Australian dollar exchange rate were making consumers cautious

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