“Bottom line? The Central bank can cut again” Photo: Louie DouvisRBA holds fire on interest rates
The Australian dollar’s descent since the Reserve Bank last met on June 4 probably tipped the scales in favour of its decision this afternoon to leave the cash rate on hold at 2.75 per cent.
In its 2.30pm announcement the central bank notes that since the June 4 meeting, markets have been more volatile in reaction to the US Federal Reserve’s announcement of a provisional timetable for the withdrawal of its $US85 billion a month quantitative easing cash crutch for the US economy.
The QE cash spreads around the world, so its withdrawal has implications for money supply and has pushed up debt yields everywhere, including here.
The Reserve goes on to say however that the Australian dollar has depreciated by about 10 per cent since April. The currency is still strong by historical standards, the Reserve says, but ‘‘it is possible that the exchange rate will depreciate further over time, which would help to foster a rebalancing of growth in the economy.’’
The Reserve may sit on the sidelines until that possibility of further falls in the dollar is confirmed or disproved, because the dollar’s descent adds another layer of stimulus to the economy, supplementing the boost the cash rate delivers as it feeds into lending rates generally.
The cash rate was at 4.75 per cent in October 2011 before the Reserve began to lower it. It has been at 2.75 per cent since May this year, but in Tuesday’s statement the Reserve says. as it has in previous months, that it could go lower.
Inflation is within its medium-term target range of between 2 per cent and 3 per cent and likely to remain so for at least a year and perhaps two years ‘‘notwithstanding the effects of the recent depreciation of the exchange rate,’’ it says, and as a result there is ‘‘some scope for further easing, should that be required to support demand.’’
The national accounts for the March quarter that came out just after the Reserve’s June 4 meeting confirmed that economic growth is slightly below par, at 2.5 per cent in the year to March.
The Reserve has been saying consistently however that it expects signs that low rates are boosting activity to grow, and is sticking to its guns with the latest decision to keep the cash rate on hold.
Rate cuts over the past year and half have ‘‘supported interest-sensitive spending and asset values,’’ it says, ‘‘and further effects can be expected over time,’’ a view that it held before, but one that is buttressed now by the stimulus a lower dollar is delivering.
Bottom line? The Central bank can cut again, but wants a clearer picture of how much stimulus the rate cuts it has already announced and the more recent fall in the Australian dollar’s value deliver before it either pulls the trigger or puts the rate-cut gun back in its holster.
This story Administrator ready to work first appeared on Nanjing Night Net.