Reserve Bank of Australia keeps key rate at 2%, with scope for easing

Tuesday 3rd November 2015

The Reserve Bank of Australia kept the cash rate unchanged at 2 percent while explicitly saying there was room to cut rates because inflation was likely to remain "low" and "a degree of spare capacity" would remain in the economy.

"At today's meeting the board judged that the prospects for an improvement in economic conditions had firmed a little over recent months and that leaving the cash rate unchanged was appropriate at this meeting," governor Glenn Stevens said in a statement. "Members also observed that the outlook for inflation may afford scope for further easing of policy, should that be appropriate to lend support to demand."

Stevens changed the wording of his statement, which he has kept relatively unchanged at recent reviews. The cash rate has been kept at 2 percent since a quarter-point cut in May and the market was split 60 percent to 40 percent for keeping rates on hold or cutting today. The Australian dollar initially dropped as low as 71.44 US cents after the statement, before rebounding to be little changed at 71.76 cents. The kiwi dollar dropped to 94.06 Australian cents from 94.29 cents.

Stevens said the board "will continue to assess the outlook, and hence whether the current stance of policy will most effectively foster sustainable growth and inflation consistent with the target," broadly the same language he used last month.

But he changed his wording for inflation, saying: "Inflation is low and should remain so, with the economy likely to have a degree of spare capacity for some time yet."

Inflation "is forecast to be consistent with the target over the next one to two years, but a little lower than earlier expected," he said. "In such circumstances, monetary policy needs to be accommodative. Low interest rates are acting to support borrowing and spending."

He also toned down his view of the property market in Sydney and Melbourne, saying while prices continued to rise, "the pace has moderated of late." Last month he said house prices in those cities "continued to rise strongly".

He also noted that volatility in financial markets had "abated somewhat for the moment", while last month he said equity market volatility had continued.

While economic growth has been somewhat below longer-term averages for some time, "business surveys suggest a gradual improvement in conditions over the past year. This has been accompanied by somewhat stronger growth in employment and a steady rate of unemployment," he said.

BusinessDesk.co.nz

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