Laura Akhurst - 2 Jun, 2014

RBA Waiting for the Economy to Adjust Before Making a Move

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eChoice RBA Commentary for June 2014.

The official cash rate remains on hold at 2.5 percent. The RBA decision was based on the following data:

o Inflation remains steady;
o Mining investment declining;
o Australian dollar remains high;
o The housing boom continues;
o Decreased capital spending;
o Consumer spending is soft; and
o Increased consumer and business spending; and
o Slight decreases in unemployment.

The official cash rate remains on hold for the 9th consecutive month after the Reserve Bank of Australia (RBA) board met today.

The RBA decision was based on inflation remaining steady and mining investment continuing to fall.

The Reserve Bank forecasted a growth for June 2014 to 3 percent due to the continued housing boom and positive consumer spending outlook. But expectations have been altered by 0.25 percentage points due to the continuing strength of the Australian dollar.

RBA governor Glenn Stevens believes lower interest rates are working, but the Australian economy is still facing issues that are slowing it down. Large declines in the resources sector are said to be having an impact on capital spending.

At present, financial experts and economists feel that the Australian economy is being pulled in different directions. The federal budget and declining investment in mining sits on one side, and the housing boom and improvements in consumer spending and business sits on the other.

The RBA suggests that the key forces balancing the economy at present are declining mining investment and the pick-up in consumer and business markets.

The Australian dollar, which was in decline last year, remains high on the exchange at US93.56c. This leads the RBA to suggest that the official cash rate will remain on hold for sometime to ensure stability in the Australian economy.

Australia’s labour market is looking positive with a slight decrease in unemployment rates. But unemployment rates still remain high. Reports of labour underutilisation have also surfaced where workers are reporting that they want to work more hours, but employers are not offering them the option.

Economists are suggesting that the RBA has not anticipated the possible impact of the federal budget on the economy. It is highly likely though, given recent media and government opposition comments, that the budget will have a negative economic impact. But only time will tell.

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