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Australia Keeps Rate On Hold, Inflation Key For Future Policy Action

Australia Keeps Rate On Hold, Inflation Key For Future Policy Action
4/3/2012 3:01 AM ET

The Reserve Bank of Australia on Tuesday retained the benchmark cash rate unchanged at 4.25 percent for a third consecutive time and said the forthcoming data on prices will be crucial in determining its policy move in May.

The central bank hinted at further monetary policy easing at its next meeting after assessing the inflation outcome for the March quarter. Rates have been kept on at each of the past two meetings after the central bank reduced rates by 25 basis points at its December meeting. The monetary policy setting arm does not meet in January.

Australia has the highest interest rate among the developed nations. In comparison, the U.S. Federal Reserve has an extremely accommodative monetary policy, with the Fed funds rate at 0-0.25 percent. Japan also maintains near zero interest rates.

In the statement released following the monetary policy meeting, Governor Glenn Steven said the board judged the pace of output growth to be somewhat lower than earlier estimated. The statement also revealed that the board felt that it was prudent to see forthcoming key data on prices to reassess its outlook for inflation, before considering a further step to ease monetary policy.

Westpac forecasts quarterly underlying inflation of 0.6 percent for the March quarter and an annual rate of 2.3 percent, which according to the firm provides ample scope for a rate cut. Thus, the firm expects a rate cut in May and another follow-up move in July.

The economy expanded by a weaker-than-expected 0.4 percent during the fourth quarter. The central bank forecast the economy to grow 3.5 percent in the year ending June 2012.

Stevens expects the CPI inflation to fall over the next quarter or two. Over a relatively longer-term horizon, namely over the coming one to two years, inflation is expected to hover between 2 percent and 3 percent. The central bank noted that underlying inflation was around 2.5 percent in 2011 and the headline inflation trended higher than that.

Stevens expects the world economy to grow at a below-trend pace this year, although believing that there is no threat of a deep downturn.

Several countries in Europe will record very weak outcomes, but the US economy is continuing a moderate expansion

Growth in China, Australia's major trading partner, has moderated and is likely to remain at a more measured and sustainable pace in the future.

Stevens also noted that the financial market sentiment has generally continued to improve in recent weeks and capital markets are supplying funding to corporations and well-rated banks.

The RBA sees Europe as a potential source of adverse shock, given the mammoth nature of the task associated with placing European banks and sovereigns on a sound footing for the longer term.

by RTT Staff Writer

For comments and feedback: editorial@rttnews.com

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