RBA chief says Australia rates on hold for some time
Australia's central bank chief said on Friday that monetary policy was likely to remain on hold for some time, but also sounded upbeat on the longer-term prospects for the economy, suggesting the next move in interest rates is still up.
February 11, 2011 / 08:43 IST
Australia's central bank chief said on Friday that monetary policy was likely to remain on hold for some time, but also sounded upbeat on the longer-term prospects for the economy, suggesting the next move in interest rates is still up.
The Australian dollar dipped to a low of USD 1.0002 in the wake of his comments, while interbank bill futures showed little reaction with markets still betting the central bank won't lift rates until late in the year.Markets have priced in just 38 basis points worth of tightening over the next 12 months ."Clearly they're very comfortable with the current policy setting and cash rate level, but the tightening bias is there," said Su-Lin Ong, head of Australia strategy at RBC Capital Markets."Given the market has got nothing fully priced in until September, October, it kind of does hint they may be on hold for a little bit longer."Reserve Bank of Australia (RBA) Governor Glenn Stevens told a parliamentary committee that it was reasonable to assume that rates will remain on hold for some time."I feel that the current level is about right for the medium-term outlook we have," he said.The RBA kept interest rates unchanged at 4.75% this month, having previously hiked by 175 basis points since October 2009. Last week the central bank also said it would look past the impact of recent floods when setting interest rates and stay focused on the medium-term outlook for strong economic growth.Stevens said the effects of serious floods and Cyclone Yasi, which caused widespread damage and dealt a major blow to some crops, could see real gross domestic product (GDP) a percentage point lower than the pre-flood forecast.But he said the effects on activity of these events would not derail the expansion.The central bank forecast GDP growth of 4% for both 2012 and 2013, levels well above the historic trend of around 3.25-3.5%.Stevens said the events should also not pose a serious threat to the achievement of the medium-term goal for inflation, "provided the community can understand their temporary nature and expectations of ongoing inflation remain well-anchored."The RBA aims to keep the consumer price index (CPI) in a 2-3% band over the long run. Fourth-quarter inflation was well in the middle of the range at 2.7%.Stevens said global growth, if anything, looked a little stronger than before with China and India sustaining a strong pace of expansion and global commodity prices rising further in recent months.Those most important to Australia such as iron ore and coal were at very high levels, as a result, the nation's terms of trade, or ratio of export to import prices, were now higher than assumed three months ago and will probably peak higher and later than previous assumed, he said.This has created a mining investment boom and the RBA is trying to offset that with slower domestic consumption. To that end, the RBA acknowledged that household credit growth was quite modest."The average since the early 1960s is mining investment maybe running at a bit under 2%, or around 2, and it's going to be on its way to 5-1/2. So that's a big change. It's a big story, no question about that," he said. Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
