RBA predicts 'period of stability in interest rates'

RBA predicts 'period of stability in interest rates'

20 February 2014 by Staff Reporter 0 comments

Minutes from the latest RBA board meeting indicate the cash rate is set to remain unchanged for some time, after the board pointed to an extended period of stability in interest rates.

>At its February meeting, the RBA board judged it was prudent to keep the cash rate unchanged while it continues to assess the impacts of the current expansionary monetary policy.

The minutes stated: “There had been further signs in recent months that policy was having its intended effects. The exchange rate had also depreciated further since the December meeting. If sustained, a lower exchange rate would be expansionary for economic activity and assist in achieving balanced growth of the economy.

“In light of this, the board's judgement was once again that it would be prudent to keep interest rates unchanged.

“The board would continue to examine the data over the period ahead to assess whether monetary policy remained appropriate, with members noting that, if the economy evolved broadly as expected, the most prudent course would likely be a period of stability in interest rates.”

Recent inflation figures appeared to be of most interest to the board, with the minutes indicating that the mix of activity and price is “something of a puzzle”.

The consumer price index rose by 0.9 per cent in the December quarter, on a seasonally-adjusted basis, to sit at 2.7 per cent higher over the year. Underlying inflation, according to a range of measures, was between 0.75 and 1 per cent in the December quarter and slightly above 2.5 per cent over the year.

Board members noted several possible explanations for the higher than expected inflation results, including that inflation could simply be reflecting “an element of noise” that at times can occur in economic data.

Alternatively, it could be that pass-through from the lower exchange rate was occurring more quickly than usual, or that pass-through of lower growth in wages was occurring more slowly than usual, according to the board.

Finally, the RBA outlined the possibility that there was less spare capacity in the economy than suspected, enabling retailers or wholesalers to increase their margins.

The RBA recently released its quarterly Statement on Monetary Policy in which the bank revised its inflation forecast for 2014, suggesting that growth may reach 3.25 per cent during the course of the year, exceeding the RBA 2-3 per cent target range.

In the statement, the RBA hinted that the increased inflation forecast could mean the end of the current easing bias.

“Based on the outlook for inflation and activity as it currently stands, the board’s view is that a period of stability in the policy rate is likely,” the report stated.

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