Australia Fails To Hike Interest Rates, Fearing Global Slowdown

Crazy Wave

Australia has maintained its key interest rate at 4.5%, refraining from further increases, as expected by consensus.

The Australian central bank appears content with Australia’s current level of inflation and seems more concerned with supporting the nation’s economic growth in the face of a potential second half slow-down:

The Reserve Bank of Australia:

The global economy grew faster than trend over the year to mid 2010. The expansion has been uneven, with the major advanced countries recording only moderate growth overall but growth in Asia and Latin America very strong. There are indications that growth in China is moderating to a more sustainable rate as policies are now less accommodating. Similar adjustments to policies and growth rates are occurring in other countries in the Asian region. In Europe, while output in some key countries has been improving significantly, prospects for next year are more uncertain given planned fiscal contraction. US growth was stronger in the first half of 2010 but the pace of labour market improvement has been slow and the expansion may be somewhat lacklustre in the second half of 2010. Overall, the Bank expects global growth to be about trend over the coming year.

The caution evident in financial markets in the past few months has abated of late, helped by the disclosure of information about European banks. Nonetheless, the global outlook remains somewhat more uncertain than a few months ago and this is reflected in the volatility of financial prices. Commodity prices are off their peaks but those most important for Australia remain at very high levels, and the terms of trade are around their peak of two years ago.

Through to mid 2011, underlying inflation is likely to be in the top half of the target zone, while CPI inflation will probably be just above 3 per cent for a few quarters due to the impact of the tax changes and increases in utilities prices.

As long as inflation remains near the target range, and interest rates remain lower in other developed nations, Australia can be patient with further interest rate hikes.

The central bank needs to make sure that the recent rise in inflation flattens out going forward

Source: Trading Economics

Australia is already well into its interest rate-hike cycle, but is taking its time

Source: Trading Economics

Unemployment is very low relative to most developed nations right now

Source: Trading Economics

Exports rebounded hard in 2010

Source: Trading Economics

The Aussie dollar has rebounded since May

Source: Finviz

Australia's ASX200 index has underperformed the S&P 500 year-to-date

Source: Bloomberg

Business confidence remains strong, but has softened

Source: Trading Economics

Consumer confidence spiked, but is volatile

Source: Trading Economics

GDP growth still needs to be higher, however

Source: Trading Economics

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