The Reserve Bank of Australia (RBA) did as expected by analysts at its monthly board meeting today deciding to leave the official cash rate unchanged at 4.5 percent.
The RBA raised concerns over the the ‘sovereign debt crisis’ enveloping Greece with the sovereign creditworthiness of several other European countries also a focus of financial markets. The RBA cited a fall in equity prices as well as long-term government bond rates for the countries least affected by the sovereign debt crisis.
As a result of the intenational instability the Australian dollar fell sharply, with the RBA still evaluating how this will play out with regards to domestic inflation pressures with imported goods increasing in price.
The EU has worked hard to contain the Greek sovereign debt crisis, however the RBA is still concerned over how this will play out and is adopting a wait and see approach to the actions of European nations to bring budget deficits down and stabilise debt over time.
With Australia’s increasingly high terms of trade the RBA expects output growth over the next 12 months to be about trend, despite earlier stimulatory policy effects subsiding. With inflation likely to be in the upper half of the target zone over the next year as a result.
Consistent with the minutes of the RBA’s last statement, the Reserve Board feels that interest rates to borrowers are around their average levels of the past decade, which is a significant adjustment from the very expansionary settings reached a year ago. Taking all the available information into account, the RBA Board views this as the correct interest rate in the ‘near term’, suggesting Australia may enjoy a few months before further increases are likely.
