Feb 7, 2012

RBA Playing With Fire - Keeps Rate Unchanged

Today the Reserve Bank of Australia decided to keep the cash rate unchanged at 4.25%. Analyst consensus was for a quarter point cut. Also the OIS market was implying a ~75% chance of a cut. RBA's decision comes as a surprise, given the recent labor market weakness and drop in retail sales. Governor Stevens' statement reads a little bit like "everything is on track and on trend so why change anything?", but does recognize that
Year-ended CPI inflation will fall further over the next quarter or two. In underlying terms, inflation is around 2½ per cent. Over the coming one to two years, and abstracting from the effects of the carbon price, the Bank expects inflation to be in the 2–3 per cent range.
As inflation is unlikely to present a problem in the near future and given the challenges to global growth (and China in particular) a rate cut might have been a lot more prudent. As always time will tell.

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