Australia Central Bank Statement

The Reserve Bank of Australia left its official cash rate unchanged at 6.00 pct as had been widely expected by the market. The decision followed yesterday's monthly meeting of the RBA board where members assessed the impact of the last 25-basis-point hike in August which followed a rise of the same magnitude in May as the central bank acted to curb inflationary pressures. The central bank did not provide details of yesterday's meeting. Nevertheless, the rate remains at a 5-1/2 year high. In August the RBA said, in a quarterly statement on monetary policy, that it expected underlying inflation over the next two years to be around 3 pct, higher than its previous forecast of 2.75 pct. The central bank said the headline consumer price index can be expected to remain significantly higher than that. It said consumer price inflation will likely remain around 4 pct in the short term but should then decline as the effect of recent increases in gasoline prices passes. In the three months to June, headline CPI rose 1.6 pct from the previous quarter and was up 4.0 pct year-on-year. The RBA aims to keep the headline rate in a 2-3 pct range on average over an economic cycle. Economists believe the central bank is still assessing the impact of the August rate increase with many still expecting another quarter percentage point hike by year-end to rein in household spending. But National Australia Bank senior market economist David de Garis said August retail sales and building approvals data, released yesterday, had a softer edge. He said the data helped strengthen the view that the tightening in monetary policy is taking the edge off domestic demand, buying more time for the RBA to keep its key rate on hold.
------------------------------------------------------------------------------------------------
The Reserve Bank of Australia will continue act cautiously but will remain pre-emptive in take measures to curb inflationary pressures, Australia and New Zealand Banking Group Ltd market economists said following central bank's decision to leave rates on hold this month. They said the RBA will continue to closely monitoring the effects of rises in its official cash rate in May and August to take the rate to 6.00 pct. ANZ head of Australian economics Tony Pearson said the next key indicator determining the direction of monetary policy will be the release of consumer price inflation (CPI) data for three months to September. Third quarter CPI data will be released on Oct 25. In the three months to June headline CPI rose 1.6 pct from the previous quarter and was up 4.0 pct year-on-year while core inflation for the year to June rose 2.9 pct. The RBA targets a headline rate in the 2-3 pct range on average over an economic cycle. "We expect the RBA will continue to be cautious but pre-emptive in achieving that objective," Pearson said. He said any further increase in core inflation, which strips out volatile items, will be likely to prompt additional policy tightening. "Our forecasts suggest there will be no abatement in core inflationary pressures," Pearson said. He said this view is supported by recent data. Pearson noted credit growth remains robust and retail spending remains solid in trend terms. As well, he said, falling gasoline prices will boost household incomes, offsetting the positive impact of lowering inflationary pressures. "Our calculations indicate that a 0.12 aud (per liter) change in petrol (gasoline) prices has a roughly equivalent impact on household cash flows as a 25 basis points change in interest rates, so the recent fall in petrol prices will more than offset the cash flow impacts of the August rate rise," Pearson said. He said market pricing currently shows a 35 pct chance of another 25 basis points rate rise by year-end, "which we think understates the risks". Pearson noted the RBA has in the past sought to send appropriate signals to clarify its intentions before any rate change. He said the next opportunity for any "clarification" will be on Oct 11 when RBA governor Glenn Stevens will deliver an address to Australian business economists titled "Economic conditions and prospects".