Australia Keeps Interest Rate At 4.25%

Reserve Bank of Australia left official interest rates steady at 4.25 percent, saying global conditions had, on balance, improved and local growth and inflation were close to target.

Extracts from Statement on Monetary Policy

The global outlook remains clouded by the sovereign debt problems in Europe. Notwithstanding this, there has been a general improvement in sentiment over the past month or so following further measures by the European Central Bank and European governments. Equity and commodity prices have picked up after earlier falls, and bond yields in a number of European countries have declined. Nonetheless, further measures by European policymakers will be required over the months ahead for public finances in a number of countries to be placed on a sustainable path.

Largely reflecting developments in Europe, official forecasts for global growth have been revised lower, with growth in the world economy now expected to be below trend in 2012, but nothing like as weak as 2008–09. As has been the case over recent years, a significant share of overall growth is expected to come from the emerging market economies, particularly those in Asia.

In Europe, the economy appears to be in recession. In contrast, the US economy has improved over recent months after a soft patch in mid 2011, with the unemployment rate declining and tentative signs of improvement in housing activity. In east Asia, growth has slowed, partly reflecting weaker export demand as well as the earlier policy tightening.

While spreads on bonds issued by a number of European governments remain elevated, they are noticeably lower than they were in late 2011. In the major bond markets, yields remain near their historic lows and, in Australia, yields on 10-year government bonds recently fell to 50-year lows, with significant purchases by non-residents, including sovereign asset managers. The Australian dollar has appreciated against major currencies over the past couple of months and is currently not far below the multi-year peaks reached last year, even though commodity prices have declined since then. Bank debt markets globally were particularly dislocated in the latter part of 2011, with minimal issuance, partly reflecting concerns about the European banking system.

Over the past month, conditions have improved, with issuance picking up markedly, but spreads on bank debt are significantly higher than they were in the middle of last year. Indeed, some large corporates are now able to raise funds in the capital markets more cheaply than banks with a higher credit rating. These global developments have had an effect in Australia, where there has been a step-up in the banks’ overall cost of funding relative to the cash rate., RBA
2/10/2012 12:28:32 PM