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Australian central bank leaves rates on hold for 11th straight month

Xinhua, March 1, 2016 Adjust font size:

Australia's central bankers have maintained their upbeat stance on the local economy despite financial market volatility, leaving the official cash rate on hold at the record low 2 percent for the 11th straight month.

Reserve Bank of Australia (RBA) governor Glenn Stevens, in a statement largely unchanged from the Feb. 2 policy meeting, said there was reasonable prospects for growth in Australia's economy, even if inflation is low but "close to target."

"The board therefore decided that the current setting of monetary policy remained appropriate," Stevens said. The board maintained its conditional easing bias "should that be appropriate to lend support to demand" if inflation remains low.

However Commonwealth Bank of Australia chief economist Michael Blythe said there are a range of influences that suggest the hurdle for the RBA to cut interest rates remains quite high.

"The bank's views on the global economy were not downgraded, the bank's characterisation of financial market volatility was not changed and the bank still sees the non-mining economy strengthening and labor market conditions improving," Blythe said in research note.

The growth in the global economy is occurring at a "slightly lower pace than expected" and financial markets have recently exhibited "heightened volatility" with a diminishing risk appetite from "diverging policy settings among the major jurisdictions," Stevens said.

Money markets will continue to price in the chance of a rate cut, hedging against the easing bias, however the RBA has a clear preference for added stimulus via a low Australian dollar and infrastructure spending.

Blythe said there is also growing concern about "the imbalances from the period of extreme policy settings" and a question of whether rate cuts work from low levels.

"Households now worry that rate cuts from record lows are an indicator of worsening economic prospects," Blythe said, adding the RBA has explicitly stated rate cuts also don't help capital expenditure.

"Firms use discount rates that are high and sticky to evaluate capex opportunities."

"And there is a risk that shareholders respond to rate cuts by demanding higher dividends that companies pay for by cutting capex." Endit