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Monetary policy outlook unchanged, RBA minutes reveal

H.S. Borji
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Monetary policy outlook unchanged, RBA minutes reveal

The Reserve Bank of Australia is unlikely to shift course on monetary policy, suggesting that interest rates will remain stable for a prolonged period in order to nurse the ailing economy back to health, the minutes of the August rate meetings revealed today.

The August 5 meetings ended with the nine-member RBA Board voting to keep interest rates at a record-low of 2.5 percent, marking a full 12 months since rates were last adjusted.

The RBA noted that the current course of monetary policy remained accommodative and supportive of demand.

“The Board judged that monetary policy was appropriately configured and that, on present indications, the most prudent course was likely to be a period of stability in interest rates,” the minutes revealed today.

RBA officials forecast inflation to remain consistent with the 2 percent to 3 percent target over the next few years, despite the recent higher readings.

“Domestic inflationary pressures were likely to remain subdued, reflecting spare capacity in labour and product markets,” the minutes said.

The Australian labour market suffered a large setback last month, as the number of people employed decreased slightly and the unemployment rate surged to a 12-year high.

Australia’s unemployment rate rose from 6 percent to 6.4 percent, the highest since June 2002, official data revealed earlier this month. The large uptick in unemployment reflected higher participation rates in the labour market, as workforce participation edged up 0.1 percentage points to 64.8 percent. In total, workforce participation increased 43,400 last month, official data showed.

July marked the first time since 2007 Australia’s unemployment rate was higher than that of the United States.

GDP growth is expected to have slowed in the second quarter, RBA officials judged, suggesting the economy will grow below trend this fiscal year.

“Output growth would probably be somewhat softer in the near term after recent higher readings, but was expected gradually to strengthen again over the forecast period,” the minutes said.

Australia’s GDP expanded 1.1 percent in the first quarter, which translated into a year-over-year gain of 3.5 percent. Both figures exceeded forecasts. The gains were driven by net exports, final consumption expenditure and private gross fixed capital formation.

The volume of exports are estimated to have declined in the second quarter, the minutes said. However, resource exports were forecast to boost growth over the forecast period, despite a faster than expected decline in mining investment.

Australia is currently suffering through a broad slowdown in resources sector investment. Combined with a stronger Australian dollar, which RBA Governor Glenn Stevens has described as “historically high,” the export sector could face headwinds in the short-term. This is especially true for exporters outside the mining sector.

The RBA noted the slight depreciation in the Australian dollar in July, but said it “remained well above its level in late January notwithstanding lower commodity prices and a narrowing in interest rate differentials between Australia and most other advanced economies since then.”

The Australian dollar was trading higher against its US counterpart following the minutes, climbing 0.18 percent to 0.9341 US.

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