The Reserve Bank of Australia (RBA) left interest rates (cash rate) at 2% for the tenth month in a row. This is news despite the apparent lack of action.
The RBA has weighed the forces on inflation and decided that at present the best thing is to keep rates as they are. It is clear from their statement, linked below, that the forces acting on inflation presently cancel each other out, rather than point to general stability.
This is always a problem with monetary policy. Some indicators point to higher inflation, others to lower. It is a central banks job to look ahead and decide which force is stronger. Typically a central bank looks two years ahead because that is how long a change in interest rates takes to affect inflation (due to the length of the transmission mechanism).
For Australia there are signs of some growth in the non-commodity sector, and this is helping the employment level. However other signs show downward pressure on demand. The RBA has decided to 'wait and see', but indicate that there may be a lowering of interest rates in the future if the economy does show it needs more help. This, in practical terms, means they will wait until inflation is projected to be above or below target in two years and at present there is too much uncertainty on this.
Below is the RBA statement on keeping rates on hold. It's quite short, but you should identify the competing forces operating on Australian inflation.
This article is vital reading for VCE students who must know how monetary policy has operated over the last four years and be very clear on demand and supply side factors affecting inflation and policy decisions. IB students need to understand the operation of monetary policy in some detail and so this represents a perfect example.
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