Photographer: Saeed Khan/AFP via Getty Images

Australia to Weigh Global Market Turmoil Impact as Rate Held

  • RBA says inflation to stay low, omits consistent with target
  • Heightened market volatility reflects clouded global outlook

Australia’s central bank will weigh a strengthening jobs market against the impact of recent global financial turbulence in deciding whether to ease policy further, having left interest rates unchanged Tuesday.

Reserve Bank of Australia Governor Glenn Stevens and his board kept the cash rate at a record-low 2 percent for a ninth month, as forecast by economists and markets. Consumer price inflation will likely “remain low over the next year or two,” Stevens said, omitting a prior forecast that it would be consistent with the RBA’s 2 percent to 3 percent target.

“Over the period ahead, new information should allow the board to judge whether the recent improvement in labor market conditions is continuing and whether the recent financial turbulence portends weaker global and domestic demand,” Stevens said in his post-meeting statement. “Continued low inflation may provide scope for easier policy, should that be appropriate to lend support to demand.”

Australian policy makers reduced borrowing costs by 2.75 percentage points since late 2011 to bolster industries outside mining, which is about half way through the unwinding of an investment boom. While the monetary easing has so far failed to deliver the higher business investment the RBA wanted, housing construction has surged and the jobless rate has declined.

Emerging Risks

“The statement suggests to us that the bank sees a number of emerging risks on the horizon, and it remains ready to cut rates if necessary,” said Felicity Emmett, a senior economist at Australia & New Zealand Banking Group Ltd.

Stevens said in today’s statement that “heightened volatility” in financial markets reflected investors grappling with uncertainty over the global economic outlook and “diverging policy settings” in economic jurisdictions.

The Australian dollar fell to 70.77 U.S. cents at 3:49 p.m. in Sydney from 71.06 before the decision.

Since the December policy meeting, the Australian currency has dropped more than 3 percent as the U.S. tightened rates, while the price of Australia’s largest export, iron ore, has stabilized at a lower level. The economy expanded 2.5 percent in the year through September, maintaining a below-average pace.

Aussie Adjustment

“The exchange rate has continued its adjustment to the evolving economic outlook,” Stevens said. “The board judged that there were reasonable prospects for continued growth in the economy, with inflation close to target. The board therefore decided that the current setting of monetary policy remained appropriate.”

“The expansion in the non-mining parts of the economy strengthened during 2015 even as the contraction in spending in mining investment continued,” Stevens said. “Surveys of business conditions moved to above average levels, employment growth picked up and the unemployment rate declined in the second half of the year, even though measured gross domestic product growth was below average.”

A key risk that is outside the control of policy makers is turmoil in Australia’s biggest trading partner, China, which is growing at the slowest pace in 25 years, grappling with a share-market rout and a currency that has fallen about 5 percent against the dollar in the past year.

Before it's here, it's on the Bloomberg Terminal.