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Interest rates on hold for 10th straight month

Business

Interest rates have been kept on hold at 2 per cent for the 10th consecutive month as the Reserve Bank of Australia noted continued economic growth with inflation moving close to target.

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“The board therefore decided that the current setting of monetary policy remained appropriate,” RBA governor Glenn Stevens said today.

Stevens said the decision was also influenced by recent information suggesting the global economy continued to grow, however, at a slower pace than expected.

“While several advanced economies have recorded improved growth over the past year, conditions have become more difficult for a number of emerging market economies.”

Stevens said China’s growth rate had continued to moderate and commodity prices, specifically oil, had further declined.

“This partly reflects slower growth in demand but also very substantial increases in supply over recent years.

“The decline in Australia’s terms of trade, which began more than four years ago, has therefore continued.”

He said financial markets had again shown heightened volatility recently combined with uncertainty about the global economic outlook and diverging policy settings among the major jurisdictions.

“Appetite for risk has diminished somewhat and funding conditions for emerging market sovereigns and lesser-rated corporates have tightened.

“But funding costs for high-quality borrowers remain very low and, globally, monetary policy remains remarkably accommodative.”

Stevens said the available information suggested the expansion in the non-mining parts of the Australian economy had strengthened during 2015, even as the contraction in spending in mining investment continued.

“Surveys of business conditions moved to above average levels, employment growth picked up and the unemployment rate declined in the second half of the year, even though measured GDP growth was below average.”

He said the lending to businesses had also picked up but inflation remained low, with the CPI rising by 1.7 per cent during 2015.

“This was partly caused by declining prices for oil and some utilities, but underlying measures of inflation are also low at about 2 per cent.

“With growth in labour costs continuing to be quite subdued as well, and inflation restrained elsewhere in the world, consumer price inflation is likely to remain low over the next year or two.

“Given these conditions, it is appropriate for monetary policy to be accommodative.

“Low interest rates are supporting demand, while regulatory measures are working to emphasise prudent lending standards and so to contain risks in the housing market.”

He said credit growth to households continued at a moderate pace, albeit with a changed composition between investors and owner-occupiers.

“The pace of growth in dwelling prices has moderated in Melbourne and Sydney over recent months and has remained mostly subdued in other cities.

“The exchange rate has continued its adjustment to the evolving economic outlook.”

He said the board would monitor whether the recent improvement in the workforce would continue.

The Australian dollar rose slightly ahead of the first board meeting by the RBA for 2016 with the dollar trading at 70.95 US cents at 12.05pm (AEDT), up from 70.77 cents on Monday.

 

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