Australian central bank drops reference to ‘policy adjustments,’ signals steady rates

The Reserve Bank of Australia kept its benchmark interest rate at a record low 2.5 percent and dropped its reference to policy adjustments in favour of stability, a move seen as code for an end to its easing bias that sent its currency up about 1 US cent.

"Monetary policy is appropriately configured to foster sustainable growth in demand and inflation outcomes consistent with the target," Governor Glenn Stevens said in a statement. "On present indications, the most prudent course is likely to be a period of stability in interest rates."

Stevens also dropped reference to the Australian dollar being "uncomfortably high". The currency dollar jumped to 88.54 US cents from 87.57 cents immediately before the statement. The kiwi dollar tumbled to 91.45 Australian cents from 92.33 cents on speculation the gap with the Reserve Bank of New Zealand's 2.5 percent official cash rate may not open as wide as expected.

Stevens hardened up the language of his latest statement compared to those for the policy reviews in the latter part of 2013.

"In Australia, information becoming available over the summer suggests slightly firmer consumer demand and foreshadows a solid expansion in housing construction," he said. "Some indicators of business conditions and confidence have shown improvement."

In his last statement on Dec. 3, he noted that the economy had been growing a bit below trend over the past year. Today he also noted that inflation in the fourth quarter was higher than expected, sitting at 2.7 percent, above the mid-point of the bank's 2 percent to 3 percent target range.

While economic growth was expected to remain below trend "for a time yet and unemployment rise further before it peaks" the economy would strengthen beyond the short-term, "helped by continued low interest rates and the lower exchange rate," while inflation was expected to be "somewhat higher" than was forecast three months ago.

The decline in the Australian dollar, which had soared to US$105.82 in April last year, "will assist in achieving balanced growth in the economy," if sustained, Stevens said.

(BusinessDesk)