Rates at 3 per cent for third month running
After weeks of mixed results, it came as no surprise to see the Reserve Bank hold the official cash rate steady at 3 per cent this month. Australia may have skirted the global recession, but the recovery remains fragile. The RBA is facing the tricky task of balancing the need to stimulate the economy, with the necessity to keep inflation at bay.
On the one hand, RBA governor Glenn Stevens noted that global conditions were looking more robust. “The global economy is stabilising, after a sharp contraction in demand during the December and March quarters. Downside risks to the outlook have diminished, with conditions in global financial markets improving this year and action to strengthen balance sheets of key financial institutions under way. Growth in China has strengthened considerably, which is having an impact on other economies in the region, including Australia,” he said.
More positive news came from the Australian economy this week. According to one consumer sentiment index, consumer confidence in July has reached its highest level since December 2007, increasing by 9.3 per cent to 109.4. The more optimistic outlook has also affected the service sector, where activity has perked up for the first time in 15 months. According to one industry group, activity in services have improved by 10.3 points to 50.2 points in June, moving into expansion territory for the first time in 14 months.
However, while economic conditions within Australia have not been as weak as expected, the construction sector and labour market continue to struggle. “Output has been sluggish and capacity utilisation has fallen back to about average levels, with some further decline likely over the rest of the year. Weaker demand for labour is leading to lower growth in labour costs,” said Mr Stevens. Meanwhile, figures from the Australian Bureau of Statistics show the official jobless rate rose to 5.8 per cent in June, after hitting 5.7 per cent in May. Such figures indicate our economy has not yet turned the corner and further unemployment is likely to have a negative impact on economic growth.
A slowdown in economic growth would, however, bring down inflationary pressures. According to one key inflation gauge, inflation in June stood at 1.4 per cent, below the Reserve Banks’ 2-3 per cent target range. However, a survey of consumer expectations of inflation this week showed consumer inflationary expectations reached a level of 3.2 per cent in July. Despite these mixed results, the RBA’s current view is that the outlook for inflation leaves some flexibility to lower rates further if necessary. To assess how it might use that window of opportunity, it will continue to monitor economic and financial conditions closely.
Infochoice.com.au