Australian Dollar Rate Outlook
THE Reserve Bank of Australia left the interest rates unchanged in February so it could assess the impact of earlier rate rises from both itself and the big banks on the domestic economy. The central bank board surprised financial markets by leaving the overnight cash rate steady at 3.75 per cent earlier this month.
"In considering the level of interest rates, members noted that the three increases in the cash rate late in 2009, together with the widening in the margins between the cash rate and many lending rates, had meant a material adjustment to the stance of monetary policy," minutes from the board meeting released today said.
"Members judged that monetary conditions were no longer exceptionally accommodative, though the structure of interest rates was still somewhat below average." The RBA had lifted the cash rate by 25 basis points at each of its meetings in October, November and December to its current 3.75 per cent.
The board noted the decision to leave the cash rate unchanged was "finely balanced" - as it also was at the December meeting - but its members expected further rate increases if the economy continued to improve as predicted.
"But they did not regard that outlook as requiring an increase at every meeting, and they saw the earlier moves to begin withdrawing monetary stimulus promptly as affording the board a degree of flexibility in its subsequent decisions," it said.
"This allowed the possibility of waiting to receive some more information on how the economy was responding to the monetary tightening that had already occurred.
"Such a course would also allow time to monitor events overseas."
The bank said most market participants had expected the cash rate to rise this month, but board members had decided the "stronger case" was to leave the cash rate unchanged.
Market economists had widely expected a quarter of a percentage point rise to 4.0 per cent on February 2.
"This decision would be accompanied by communication that, if economic conditions evolved broadly as expected, further adjustments to policy would probably be needed over time to ensure that inflation remained consistent with the target over the medium term," the minutes said.
The RBA uses monetary policy, or interest rates, to keep inflation within a target range of two to three per cent over the economic cycle. Headline consumer price inflation (CPI) was 0.5 per cent in the December quarter for an annual rate of 2.1 per cent, recent official data show.
Underlying inflation, the RBA's preferred measures as it removes volatile items, was 0.6 per cent in the December quarter, while the annual rate was 3.4 per cent - still above the bank's target range.
"Members noted that the forecasts were for further declines in the year-ended rate of underlying inflation, though the expected trough in inflation had been revised up slightly," the RBA said.
In its quarterly statement on monetary policy released on February 5, the RBA forecast underlying inflation to fall within its inflation target in the first half of 2010.
To read more please visit www.news.com.au
Pounds to Australian Dollars = 1.7611
Euros To Australian Dollars = 1.5350
Australian Dollars to US Dollars = 0.8909
Australian Dollars to New Zealand Dollars = 1.2550
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