It Stays the Same Says the RBA

For the second time in two months, the Reserve Bank of Australia has decided to keep interest rates steady, keeping its benchmark rate at 4.50%. This comes after a series of six rate hikes in seven months. Still, RBA Governor Glenn Stevens did drop some positive comments that traders gobbled up a like an Outback Steak.

Stevens said that he believes that Chinese and Asian growth will continue to expand. Take note that sustainable growth in Asian markets is just as important to Australia as lip gloss is to women. Remember, China is one of Australia’s biggest trading partners, so as long as the Chinese economy keeps chugging along, Australia stands to benefit.

Now, even though Stevens layered his statements with some sprinkles of confidence here and there, I could still feel a lot of cautiousness from the central bank. In my view, the RBA decided to stop with its rate-hiking ways because of two key reasons – weak inflation and unimpressive growth.

On the first point, Australia’s consumer price index showed that inflationary pressures just aren’t quite strong. Despite almost doubling from the previous period, Australia’s most recent q/q CPI stood only at 0.9%, still far from the bank’s target range.

Secondly, and perhaps more importantly, Australia’s GDP growth for the first quarter this year was a mere 0.5%, below the 0.6% expected. Heck, even if the GDP did hit forecast, it is still way below Australia’s potential given how strong business and consumer confidence were. In fact, household spending, government consumption and public investment all grew, but as it turns out, they weren’t enough to help Australia post stellar GDP figures.

Given this data, it’s no wonder that Stevens and his band of central bank brothers are still concerned about the current state of recovery. Coupling this with concerns regarding the debt contagion from the euro zone, as well as recent signs of weakness in the US economy, I’m not surprised that the RBA has pulled a Fed and taken a “cautious but optimistic” stance.

Looking ahead, the RBA has kept mum about the schedule of their future rate hikes. Still, economists are hoping that the central bank will resume their aggressive tightening moves before we bid farewell to 2010. If my memory serves me right, Australia’s cash rate was projected to top out at 5.00% by the end of the year and even reach 6.5% in 2011. Then again, those optimistic estimates were made before debt concerns started popping up from almost everywhere.

For now, RBA officials maintain that their less-aggressive monetary policy stance is appropriate for current market conditions. With all the uncertainty surrounding the markets right now, it’d be prudent for Australia to wait and see whether this would lead to an economic meltdown as well. Maybe their second quarter GDP reading, slated to be released early September, could confirm whether the Land Down Under could stay resilient for yet another global economic fiasco.