The Reserve Bank of Australia at it’s September board meeting today has decided to leave the cash rate unchanged at 4.5 percent.
The Reserve Bank expects the global economy to cool over the rest of the year, with the growth in China slowing to a more sustainable rate which will flow on to demand for Australian resources, particularly minerals. Winding back of fiscal stimulus across Asia and Europe will see demand moderate in the second half of the year. US growth was described as ‘solid’ by the RBA in the first half of 2010 but is looking weaker for the remainder of the year.
Financial markets are performing relatively smoothly, though caution persists and sovereign bond yields are at unusually low levels. Commodity prices are also off their peaks with a lower demand in China, particularly for coal and iron ore flowing through to commodity prices, although these still remain at relatively high levels.
Australia’s economy is described by the RBA as growing at “around trend pace”, which was underpinned by the Federal Government fiscal stimulus over the last year and with private demand returning as public spending contracted. Indications are that business investment in particular could increase strongly.
Business credit has stabilised and while credit conditions for some sectors remain difficult, evidence is slowly emerging of more willingness to lend. Credit outstanding for housing has slowed a little over recent months, and the upward pressure on dwelling prices appears to have abated.
Inflation is still a risk in the Australian economy, with wages increasing somewhat, after falling last year. Through to mid 2011, underlying inflation is likely to be in the top half of the target zone, while CPI inflation will probably be just above 3 per cent for a few quarters due to the impact of the tobacco tax changes.