RBA retains easing bias, watches labour market pickup, financial turbulence

Tuesday 2nd February 2016

The Reserve Bank of Australia kept its cash rate unchanged, while reiterating an easing bias given weak inflation, and said it will be watching for signs of continued improvement in the labour market and whether financial market turbulence points to weaker global and domestic demand.

"Over the period ahead, new information should allow the board to judge whether the recent improvement in labour market conditions is continuing and whether the recent financial turbulence portends weaker global and domestic demand," said governor Glenn Stevens. "Continued low inflation may provide scope for easier policy, should that be appropriate to lend support to demand."

The Australian dollar dropped to 70.85 US cents, having initially spiked higher to 71.29 cents after the statement was released, from 70.98 cents immediately before. The kiwi dollar dropped as low as 91.83 Australian cents from 92.08 cents, and was recently at 91.99 cents.

The statement was broadly consistent with what Stevens said on Dec. 1, although he noted the continued decline in commodity prices, singling out crude oil, in the face of slower growth in demand and "substantial increases in supply in recent years." As a result, Australia's terms of trade continued to weaken.

Stevens also noted recent heightened volatility in financial markets "as participants grapple with uncertainty about the economic outlook and diverging policy settings among the major jurisdictions" and that appetite for risk has "diminished somewhat." In the December statement, he had said volatility had abated "somewhat for the moment."

Brent crude was recently at US$33.74 a barrel, down from US$44.44 at the start of December and from US$57.91 a year ago. The Thomson Reuters CRB Commodity Index has fallen about 11 percent since the RBA's last statement. The Chicago Board Options Exchange Volatility Index or VIX, known as Wall Street's fear gauge, rose as high as 27.59 on Jan. 20, from 14.67 on Dec. 1, and had recently settled back to 19.98.

Stevens said recent data suggests that the expansion in the non-mining parts of the Australian economy "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 pace of lending to businesses also picked up."

He said the pace of growth in dwelling prices "has moderated in Melbourne and Sydney over recent months and has remained mostly subdued in other cities."

BusinessDesk.co.nz

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