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RBA leaves rates unchanged at 4.75%

Written by Sam Coxhead on February 1st, 2011.      0 comments

2:43 PM (AEST) The Reserve Bank of Australia have just announced that they leave the cash rate unchanged at 4.75% , which was widely expected and where it has been since November last year. The attention was always going to be on the RBA’s interpretation of the economic impact of the devastating floods.
Coming into the release of the RBA decision and comments the AUD saw grinding appreciation in what looked to squaring up of sold positions ahead of the announcement.  The AUD has had a high today of 1.0016. Helping the AUD on its way has been well bid markets for EURO and in particular GBP. As the market appears to be discounting the geo-political tension in Egypt, the USD has come under some considerable pressure. For the time being it would appear that the rangy nature of both the NZD and AUD markets will continue. Solid demand for NZD has seen it bounce back of the day’s lows against the EURO,GBP and YEN.
Copied below are the comments from the RBA, which I would term as appropriately benign. It seems to be a case of wait and see what transpires over the next few months before having any particular bias. Given the benign nature of the comments there is potential for the AUD to drift off from the current levels.
  Current level Pre-RBA Chge since RBA
NZD/USD 0.7737 0.7750 -0.2%
AUD/USD 0.9995 0.9995 0.0%
NZD/AUD 0.7741 0.7752 -0.1%
AUD/NZD 1.2918 1.2900 0.1%
NZD/GBP 0.4823 0.4829 -0.1%
NZD/EUR 0.5640 0.5647 -0.1%
NZD/JPY 63.38 63.52 -0.2%
NZD/CAD 0.7729 0.7742 -0.2%
Statement by Glenn Stevens, Governor: Monetary Policy Decision
At its meeting today, the Board decided to leave the cash rate unchanged at 4.75 per cent.
Global output grew strongly in 2010, notwithstanding the relatively subdued performance of several of the major economies. The Chinese and Indian economies in particular have recorded very strong expansions, and price pressures, particularly for food and raw materials, have picked up. Concerns about sovereign creditworthiness in Europe have remained prominent and uncertainty from this source seems likely to persist for some time. Overall, however, the global economy continues to look strong going into 2011. Commodity prices have remained high and in many instances have risen further over recent months.

Australia's terms of trade are at their highest level since the early 1950s and national income is growing strongly. There have been further indications that private investment is beginning to pick up in response to high levels of commodity prices. In the household sector thus far, in contrast, there continues to be caution in spending and borrowing, and an increase in the saving rate.  Asset values have generally been little changed over recent months and overall credit growth remains quite subdued, notwithstanding evidence of some greater willingness to lend.

Employment growth was unusually strong in 2010. Most leading indicators suggest further growth, though most likely at a slower pace.  After the significant decline in 2009, growth in wages picked up somewhat last year.  Some further increase is likely over the coming year.
Inflation is consistent with the medium-term objective of monetary policy, having declined significantly from its peak in 2008. Recent data show underlying inflation at around 2¼ per cent in 2010. The CPI rose by about 2¾ per cent, reflecting the once-off effect of the increase in tobacco excise.  These moderate outcomes are being assisted by the high level of the exchange rate, the earlier decline in wages growth and strong competition in some key markets, which have worked to offset large rises in utilities prices. The Bank expects that inflation over the year ahead will continue to be consistent with the 2–3 per cent target.

The flooding in Queensland and Victoria is having a temporary adverse effect on economic activity and prices. Some production of crops and resources has been lost and some other forms of economic output have also been lower in the affected areas. 

Prices for the relevant commodities have risen and are likely to remain elevated in the near term. Resumption of production is occurring at differing speeds by region and industry. In setting monetary policy the Bank will, as on past occasions where natural disasters have occurred, look through the estimated effects of these short-term events on activity and prices. The focus of monetary policy will remain on medium-term prospects for economic activity and inflation.

The floods also resulted in damage or destruction to physical capital in the affected regions. Over the next year or two, the efforts to repair or replace infrastructure and housing will add modestly to aggregate demand, compared with what would otherwise likely have occurred. The extent of this net additional effect will depend on the full extent of the damage, the speed of the rebuilding, and the extent to which other public and private spending is deferred. The Bank's preliminary assessment is that the net additional demand from rebuilding is unlikely to have a major impact on the medium-term outlook for inflation.

The Bank will of course continue to assess the effects of the floods and the subsequent recovery, along with all the other factors having a bearing on economic conditions. At today's meeting, the Board judged that the current stance of monetary policy remained appropriate in view of the general macroeconomic outlook.