May 28, 2017

RBA Moves Could Impact Oil Prices

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RBA Moves Could Impact Oil Prices

During the Reserve Bank of Australia (RBA) latest meeting in July 2016, they decided not to change the previous policies and directions outlined by the Monetary policy committee.  This is an event that will likely continue to impact commodities prices, as Australia is one of the world’s largest commodities producers.

During their previous meeting dated June 2016, the RBA did not implement additional monetary stimulus as the economic outcast was quite positive for the year 2016 so far.  They kept their benchmark cash rate unchanged at 1.75 %, its record low to date since they last cut it on a 25 basis point in 2016.  The Melbourne Institute, an economic think-tank, in its July 2016 report, said that they “expects the domestic demand growth to be moderate in the medium term.”

GDP Growth in Australia

The GDP growth for the period January-March 2016 expanded 3.1 %, which was hailed as the fastest pace of acceleration in recent years and gives cautious optimism for this end of the year’s forecast to be in range.  As oil prices are doing better but there is a persistently low inflation, the RBA wanted to keep its policies steady for the time being, according to various economists.

However, because of the low inflation problem, the RBA might decide to take some actions and cut a further 0.25 % in their benchmark rate in August 2016, in order to try and stimulate inflation, according to some news reports and economists.  Central Bank’s Governor Glenn Stevens warned, in a speech, that “the Reserve Bank of Australia would adjust policy as appropriate based on GDP growth and inflation views.”

Inflation Indicators

The inflation indicator is currently held at 1.3 % for 2016, lower than expected by economists; the inflation forecasts put the inflation rate at between 1-2 % for the end of the year, far below than the intended target of 2-3 %.  The RBA also indicated that the Brexit has had, so far, little impact on the Australian economy; however, this may change as the Brexit situation unfold.

According to the Council of Financial Regulators on Australia’s latest report about the Brexit consequences, “the effect on economic activity in Australia, and the financial sector is expected to be small. Trade links to the UK are small.”  The Australian job market is also doing well with an unemployment rate of 5.7 % in 2016.  The next decision on whether to cut interest rates, in the hope of boosting growth further and level the inflation rate, will be taken on 2nd of August 2016, a meeting which many economists and markets are waiting for.

Mainly, the real worry faced by Australia’s economy at the moment tends more to do with deflation rather than anything else; however, deflation could cause a lot of trouble to Australia’s exportation market and nationally.

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