RBA Kept The Powder Dry, Judging Spare Capacity Would Keep Unemployment Rate Elevated

The RBA left the cash rate unchanged at 2.5% for the 13th month in September. While standing on the sideline, policymakers stressed that the monetary policy remained ‘accommodative’ as interest rates, which had been low, had continued to ‘edge lower’ as ‘competition to lend has increased’. On economic developments, the central indicated that the spare capacity remaining in job market remained would keep the unemployment rate elevated for sometimes. Policymakers also warned of china’s property market and strength in the Australian dollar. Domestic economy is expected to grow a little below trend over the year ahead.

On the global economy, the RBA pointed out that the property market of China is facing a challenge in the near-term, whilst the country’s growth remained ‘generally in line with policymakers’ objectives’. In general, growth in the global economy continued at ‘a moderate pace’.

Despite acknowledgement of the improvement in some employment indicators, the RBA indicated that the unemployment has ‘increased recently’. It also judged that ‘the labor market has a degree of spare capacity and that it will probably be some time yet before unemployment declines consistently’. The decline in wage growth was noticeable and was expected to ‘remain relatively modest over the period ahead’. The trend should keep inflation ‘consistent with the target even with lower levels of the exchange rate’.

While AUDUSD has dropped -16% from the record high of 1.10 made in 2011 and -2.1% from this year’s high of 0.95, the RBA remained concerned about the damage of a high currency on the recovery. Governor Glenn Stevens suggested that the Australian dollar stayed ‘above most estimates of its fundamental value, particularly given the declines in key commodity prices’. Excessive strength in Aussie is ‘offering less assistance than would normally be expected in achieving balanced growth in the economy’.

The decision to stand on the sideline was widely anticipated. Policymkaers noted in the accompanying statement that, the monetary policy remained ‘accommodative’ and was ‘appropriately configured to foster sustainable growth in demand and inflation outcomes consistent with the target’. The RBA reiterated that ‘the most prudent course is likely to be a period of stability in interest rates’.

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