4 Reasons Why the Australian Reserve Bank has not Cut Interest Rates

interest rates||RBA Interest Rates

Australian Reserve Bank has not Cut Interest Rates

The Reserve Bank of Australia (RBA) has slashed interest rates to 3%, a record low, in November 2011. For the last 15 months, it has refused to increase or further cut it. The central bank has decided to leave the rates unchanged during its first policy meeting for this year, which was held in the first week of February. As it seems, the monetary policy of the country keeps the mode on a wait-and-see program.

Interest rates were last trimmed down to help spur possible growth after the then decade-long mining boom had indicated clear signs of losing its momentum. The economy somehow slowed in the entire 2012 because export demand for raw materials coming from the country eased.

The RBA has hinted that it has no plans of reducing rates any further soon. In the last couple of weeks, there were speculations that it would finally initiate a slight lowering of the rates. Governor Stevens has already reiterated that the central bank intends to stick to its current easing bias. But still, several analysts think that RBA would ease its stand and finally give in to a quarter-point interest rate reduction over the coming 12 months.

Here are four logical and perceived reasons for RBA to stall any move to trim down interest rates during the recent policy meeting.

  • There is a sufficient interest rate stimulus lined up in the pipeline. The central bank is confident that the strategy needs more time to take effect. RBA Governor Glenn Stevens thinks the current interest rate level is just ‘appropriate.’ Some analysts assert that there are indications that the monetary policy stimulus has been flowing into the non-mining sectors of the national economy. The current interest rate level is expected to help non-mining businesses to pick up and fill any void that would be left by an anticipated peak of the resource spending boom.
  • Interest rates are already low than those would have been because of the stubbornly strong Australian dollar. The high local dollar is acting as a drag to numerous parts of the national economy. Keeping interest rates under control is one of the ways to manage it. A strong currency has been hurting most Australian exporters especially manufacturers, which now find it more difficult to compete in the international marketplace.
  • Moreover, the tamed outlook on inflation means there is plenty of room for interest rate cuts if those would be necessary in the future. As it is, further cuts in rates would be necessary if ever there would be a requirement in the future to support demand. But these days, there is still no need to do that.
  • The central bank remains confident about the improvement in the global economy, which directly affects the country. For instance, RBA is optimistic that a recent short-term slowdown in China would finally end. If that happens, trading transactions between Australia and China would be revitalised. Up to this day, the Asian country remains as the biggest export market of Australian goods (particularly mined resources). As the Chinese economy grows tremendously, a less rapid growth in that market directly affects trade with Australia, as what happened recently.

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