As expected by economists and markets alike, the RBA kept its official cash rate unchanged at 2.0% its February monetary policy meeting.
In the monetary policy statement released alongside the rate decision, the board noted that “there were reasonable prospects for continued growth in the economy”. In unison with “inflation close to target”, the board suggested that “the current setting of monetary policy remained appropriate”.
While akin to its last statement released on December 1, the board acknowledged that it is currently monitoring the impact on the economy from recent turbulence in financial markets, noting that “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”.
This suggests an increased degree of uncertainty towards the outlook for the domestic labour market along with economic growth, both globally and domestically.
Given its very definition – to be a sign or warning that something usually bad is likely to happen – the purposeful use of the word “portends” to reflect the heightened level of uncertainty was also noted by many market watchers.
As a result of the increased uncertainty, the board left its mild easing bias intact – indicating that rates can still be lowered if necessary – acknowledging that “continued low inflation may provide scope for easier policy, should that be appropriate to lend support to demand”.
Despite the recent buoyancy in the Australian dollar, bucking a continued slide in commodity prices, the board expressed little immediate concern, suggesting that “the exchange rate has continued its adjustment to the evolving economic outlook”.
This was tweaked from the December statement where it was “adjusting to the significant declines in key commodity prices”.
While uncertainty about outlook for the economy intensified, the board stuck a positive tone towards recent developments in non-mining sectors of the economy, suggesting that “available information suggests that the expansion in the non-mining parts of the economy strengthened during 2015 even as the contraction in spending in mining investment continued”.
“Surveys of business conditions moved to above average levels, employment growth picked up and the unemployment rate declined in the second half of the year, even though measured GDP growth was below average,” read the statement. “The pace of lending to businesses also picked up.”
In combination, the mild easing bias, commentary towards the Australian dollar and positive tone towards developments in non-mining sectors of the economy indicates that the bar for further rate cuts remains high despite the low inflation outlook, increased uncertainty and recent volatility across financial markets.
As was the case late last year, the RBA remain in wait-and-watch mode in regard to whether further policy stimulus will be required.
While markets still suggest that it’s more likely that rates will move lower, rather than higher, in the period ahead, the February statement indicates that offshore factors, rather than domestic, will likely act as the catalyst for any further policy easing, if delivered.
Here’s the full monetary statement released by RBA governor Glenn Stevens.
At its meeting today, the Board decided to leave the cash rate unchanged at 2.0 per cent.
Recent information suggests the global economy is continuing to grow, though at a slightly lower pace than earlier expected. While several advanced economies have recorded improved growth over the past year, conditions have become more difficult for a number of emerging market economies. China’s growth rate has continued to moderate.
Commodity prices have declined further, especially oil prices. This partly reflects slower growth in demand but also very substantial increases in supply over recent years. The decline in Australia’s terms of trade, which began more than four years ago, has therefore continued.
Financial markets have once again exhibited heightened volatility recently, as participants grapple with uncertainty about the global economic outlook and diverging policy settings among the major jurisdictions. Appetite for risk has diminished somewhat and funding conditions for emerging market sovereigns and lesser-rated corporates have tightened. But funding costs for high-quality borrowers remain very low and, globally, monetary policy remains remarkably accommodative.
In Australia, the available information suggests that the expansion in the non-mining parts of the economy strengthened during 2015 even as the contraction in spending in mining investment continued. Surveys of business conditions moved to above average levels, employment growth picked up and the unemployment rate declined in the second half of the year, even though measured GDP growth was below average. The pace of lending to businesses also picked up.
Inflation continues to be quite low, with the CPI rising by 1.7 per cent over 2015. This was partly caused by declining prices for oil and some utilities, but underlying measures of inflation are also low at about 2 per cent. With growth in labour costs continuing to be quite subdued as well, and inflation restrained elsewhere in the world, consumer price inflation is likely to remain low over the next year or two.
Given these conditions, it is appropriate for monetary policy to be accommodative. Low interest rates are supporting demand, while regulatory measures are working to emphasise prudent lending standards and so to contain risks in the housing market. Credit growth to households continues at a moderate pace, albeit with a changed composition between investors and owner-occupiers. The pace of growth in dwelling prices has moderated in Melbourne and Sydney over recent months and has remained mostly subdued in other cities. The exchange rate has continued its adjustment to the evolving economic outlook.
At today’s meeting, the Board judged that there were reasonable prospects for continued growth in the economy, with inflation close to target. The Board therefore decided that the current setting of monetary policy remained appropriate.
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. Continued low inflation may provide scope for easier policy, should that be appropriate to lend support to demand.
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