The Reserve Bank of Australia (RBA) has officially confirmed it will be taking a neutral view on interest rates. The Bank had been hawkish over the past several months as the Australian economy displayed robustness in the face of sluggish global growth. The latest policy announcement from the RBA, at 3:30 GMT this morning, re-iterated that the official cash rate would remain at 2.5% for short to medium term.
Glenn Stevens, Governor of the RBA, acknowledged the challenging set of circumstances facing the Australian economy in his post policy announcement statement. The primary factor concerning the policy makers is unemployment. Australia recently experienced a turnaround in it’s falling unemployment rate. The January rate of 6.0% shocked the market, at 0.2% higher than the previous months figure it was not only the reversal itself that surprised but the actual magnitude of the reversal. Compounding the problem was the fact that Australia has recalculated the method for determining the labor force participation rate, implying that the actual jump in unemployment is somewhat higher. In the refreshing Australian style, Stevens frankly noted in his statement that unemployment would rise further before any improvement takes hold.
The RBA has a 2 year target inflation rate between 2% and 3%. The latest inflation figures show the year on year price index at 2.7%, a 0.5% jump on the previous number. The Australian Central Bank has found itself in the unenviable position of simultaneously fighting rising inflation and rising unemployment. It seems that with the RBA backing away from the promised rate hike that they have chosen to tackle the unemployment problem first. This is an acceptable position for now as Australia has traditionally run inflation at around 2.75%.
Although off the 2011 highs of $1.11 against the US Dollar, the Aussie Dollar still remains stubbornly expensive. The trend however is in the right direction, the AUD has depreciated substantially over the past 12 months and this looks set to continue as support around the current .87 – .89 range is largely absent. Today’s interest rate announcement of a return to a neutral monetary policy should contribute to the further devaluation of the Aussie Dollar, a situation that will aid the economic recovery in the long term.
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