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Azerbaijan cuts rate 200 bps, starts unwinding 2016 hikes

February 12, 2018 by CentralBankNews   Comments (0)

      Azerbaijan's central bank lowered its benchmark refinancing rate by 200 basis points to 13.0 percent as it begins to unwind four sharp rate hikes two years ago that were aimed at bolstering confidence in its manat currency and stem inflation following the plunge in crude oil prices.
       It is the first rate cut by the Central Bank of Azerbaijan (CBA) since it raised it by a total of 12 percentage points between February and September 2016, with the central bank attributing the rate cut to an expected decline in inflation and an improving external balance.
       The CBA believes further rate cuts are possible as it gradually transitions to a neutral monetary policy that will have a positive impact on economic activity.
        In addition to the cut in the refinancing rate, the central bank lowered the upper limit of its interest rate corridor to 16 percent from 18 percent and the lower limit to 8 percent from 10 percent.
        Oil and gas account for about 95 percent of Azerbaijan's exports and 75 percent of government revenue so the fall in crude oil prices in the second half of 2014 hit the economy hard, undermining confidence in the manat.
        From 2011 the CBA effectively pegged its manat to the U.S. dollar so the CBA had to draw heavily on its reserves to defend it. But as local depositors switched into U.S. dollars, the CBA was forced to abandon first its dollar-peg in early 2015 and then later that year a dollar-euro basket peg.
        In December 2015 the CBA then switched to a floating exchange rate regime that finally helped stabilize the exchange rate.
        Higher oil prices, along with economic reforms, helped Azerbaijan's current account balance swing into a surplus of 5 percent of Gross Domestic Product by end-2017 along with a trade surplus that exceeded US$5 billion as exports jumped 52 percent.
        An improved balance of payments not only resulted in an 11 percent rise in currency reserves, but helped stabilize the manat, with the CBA expecting the positive trend to continue this year.
        Earlier this month the CBA said its currency reserves had risen by an annal 24.4 percent to US$5.38 billion in January, with reserves in 2017 up by 34.2 percent from 2016.
        "The stabilization of the exchange rate of the manat has had a positive impact on the de-dollarization process, financial stability and a reduction of inflation expectations," the CBA said, adding the real effective exchange rate is down 36 percent since the end of 2014, stimulating the export of non-oil products and import substitution.
        Today the manat was trading at 1.7 to the U.S. dollar, largely steady this year but down  8.8 percent since December 2015 when it floated the currency.
        Azerbaijan's inflation rate eased to 12.9 percent in December last year, with the central bank saying average inflation in January was 5.5 percent.
        This disinflation trend is forecast to continue, with surveys showing a downward impact on inflation expectations by households and businesses.
        Azerbaijan's economy grew by 0.1 percent in 2017, up from a 3.8 percent contraction in 2016, with the central bank saying the state statistical committee estimated that the non-oil sector grew by 2.7 percent last year and positive growth this year is expected to continue based on increased investments, non-oil exports and higher consumer confidence.

Russia cuts rate 25 bps and to cut further on low inflation

February 9, 2018 by CentralBankNews   Comments (0)

       Russia's central bank lowered its key monetary policy rate by 25 basis points to 7.50 percent and said it would continue to cut rates further as it moves toward a neutral policy stance this year as inflation is now sustainably low and inflation expectations continue to diminish.
       It is Bank of Russia's first rate cut this year and follows six rate cuts in 2017.
       The central bank has now cut its key rate by 750 basis points since January 2015 when it slowly began rolling back a sharp 750 point rate hike in December 2014 aimed at protecting the ruble after it plunged in the wake of the Ukraine conflict.
       Analysts had expected the rate cut following a drop in inflation to 2.2 percent in January, the lowest since measurements began in 1991, and well below the central bank's 4.0 percent target.
       And last week Elvira Nabiullina, Bank of Russia governor, then said rates could be cut faster than previously thought and as soon as today, adding she saw little economic or financial impact from possible new U.S. sanctions.
        Nabiullina also said the central bank's key rate could be brought to a neutral level of 6 or 7 percent sooner than the bank had planned as inflationary risks had eased.
        The steady decline in Russia's inflation rate from 2015 and the potential for further rate cuts will ease monetary conditions, setting up conditions for inflation to approach 4 percent and also enable the central bank to support domestic demand.
       "This year annual inflation is much less likely to exceed 4%," the central bank said, adding "in this environment the Bank of Russia will continue to reduce the key rate and may complete the transition from moderately tight to neutral monetary policy in 2018."
        The central bank expects inflation to continue to ease in the first half of this year due to the comparison with high food prices last year and then remain somewhat below 4 percent in 2018 and remain close to this in 2019.
         The steady fall in inflation is helping curb inflation expectations though these still remain "unstable and uneven." But this should decline as inflation falls and expectations become more anchored and less sensitive to sudden changes in food prices as in the past.
       "Therefore the balance of inflationary and economic risks has slightly slightly towards the risks to economic growth," the central bank said.
       Russia's economy pulled out of a deep recession last year though the pace of growth eased in the fourth quarter, the bank said.
       But industrial output resumed its monthly growth in December and will be further supported by higher domestic demand as real wages rise and global economic growth expands.
        Gross Domestic Product grew by an annual rate of 1.8 percent in the third quarter, down from 2.5 percent in the second quarter. For 2017 growth has been estimated at 1.5 percent, below the government's aim for at least 2 percent growth.
         Russia's ruble has been rising steadily since January 2016 though it has depreciated in the last month. Today it was trading at 58.3 to the U.S. dollar, down 1 percent this year but up 3.8 percent since the start of 2017.

        The Bank of Russia issued the following statement:

"On 9 February 2018, the Bank of Russia Board of Directors decided to cut the key rate by 25 bp to 7.50% per annum. Annual inflation remains sustainably low. Inflation expectations are diminishing progressively. Short-term pro-inflationary risks have abated. Therefore the balance of inflationary and economic risks has shifted slightly towards the risks to economic growth. The uncertainty over the situation in global financial markets has increased. This year annual inflation is much less likely to exceed 4%. In this environment the Bank of Russia will continue to reduce the key rate and may complete the transition from moderately tight to neutral monetary policy in 2018.
In making its key rate decision, the Bank of Russia recognised the following factors.
Inflation dynamics. Annual inflation remained sustainably low. In January 2018 it stood at 2.2%. Permanent factors slow down consumer price growth alongside temporary factors. Furthermore, permanent factors may have stronger effect on inflation than previously estimated.
In January 2018, annual consumer price growth declined across all staple goods and services. Food inflation slowed to 0.7% while non-food inflation declined to 2.6%; service prices increased by 3.9%. According to Bank of Russia estimates, most annual inflation indicators reflecting the most sustainable price movements are below 4%.
Increased supply in the farm produce market continued to exert downward pressure on food inflation. Most factors associated with the 2017 harvest will cease to have a disinflationary influence in the first half of 2018. At the same time, investment in agriculture and the sector’s technological advancement pave the way for a sustainable increase in its production capacity in the medium term. The contribution of the exchange rate dynamics of the latest months to annual inflation slowdown will be exhausted by the end of the first quarter of this year.
The slowdown of inflation was conducive to inflation expectation decline which nevertheless remains unstable and uneven. This requires both further decrease in inflation expectations and reduction in their sensitivity to price changes.
The slowdown of annual consumer price growth may continue in the first half of 2018. This partially results from last year’s high base effect of food inflation. According to the Bank of Russia’s forecast, annual inflation will remain somewhat below 4% in 2018 and will hold close to this reading in 2019.
Monetary conditions. Monetary conditions were gradually easing in 2017. Interest rate dynamics was a key contributor to easing of monetary conditions. At the same time, real interest rates remain positive promoting savings. Non-price lending conditions have been largely constraining with banks demonstrating conservative approach to screening borrowers and increasing lending on the back of elevated borrowers’ risks. A balanced recovery of lending poses no pro-inflationary risks.
The key rate decision and the potential for its decrease in the future will contribute to further easing of monetary conditions, thus creating prerequisites for inflation to approach 4% and supporting domestic demand.
In the course of transition to neutral monetary policy, the shape of the yield curve will continue to return back to normal. Given the situation, the potential for lowering short-term rates is greater than for long-term ones.
Economic activity. The fourth quarter of 2017 saw a slowdown in economic activity. However, some uncertainty remains in the assessments of the reasons behind this slowdown, also due to temporary factors.
After decline in November 2017 in December 2017, industrial output resumed monthly growth. Producer sentiment remains relatively high. It will be further supported by higher domestic demand as real wages increase and global economic growth expands. Unemployment does not generate any excessive inflationary pressure.
Inflation risks. Short-term pro-inflationary risks have abated. Therefore the balance of inflationary and economic risks has shifted slightly towards the risks to economic growth. The uncertainty over the situation in global financial markets has increased. This year annual inflation is much less likely to exceed 4%. In this environment the Bank of Russia will continue to reduce the key rate and may complete the transition from moderately tight to neutral monetary policy in 2018.
The Bank of Russia hardly revised its medium-term risk estimates for inflation.
Depending on the situation, a number of factors may cause inflation to deviate from the target both upwards and downwards. They include the dynamics of highly volatile food and oil prices. The fiscal rule will set off the impact of oil market conditions on inflation and domestic economic environment as a whole. At the same time, certain factors generate mostly pro-inflationary risks: they include the developments in the labour market, potential changes in consumer behaviour, and the nature of inflation expectations.
In the medium term (in 2019-2020) the risks of inflation’s upward deviation from 4% still prevail over deviation below 4%. First, increased structural labour shortage may cause labour productivity growth to considerably lag behind wage growth. Second, inflationary pressure may stem from changes in households’ behaviour as the propensity to save becomes much lower. Third, inflation expectations remain elevated and subject to fluctuations caused by movements in prices of certain goods and services and the exchange rate. Besides, the medium-term balance of risks for inflation dynamics will depend on potential budgetary and tariff decisions in 2019–2020.The Bank of Russia will also monitor risks posed by external factors over the entire forecast horizon.

The Bank of Russia Board of Directors will hold its next rate review meeting on 23 March 2018. The Board decision press release is to be published at 13:30 Moscow time."

Mexico raises rate 25 bps, but strikes less hawkish tone

February 8, 2018 by CentralBankNews   Comments (0)

      Mexico's central bank raised its benchmark interest rate by a further 25 basis points to 7.50 percent, as expected, but struck a more neutral tone than in December by saying it would act in a timely and firm manner "if necessary" to anchor inflation expectations and meet its inflation target.
      Today's policy statement by the board of Bank of Mexico (Banxico) compares with its hawkish statement in its previous statement when it said it would be "vigilant" and act as soon as possible to anchor inflation expectations and achieve the inflation target, given the intensification of the risks that could affect inflation.
      It is Banxico's first rate hike this year but it has now raised its rate by a total of 450 basis points since December 2015 when the U.S. Federal Reserve began tightening its policy.
      Illustrating the more balanced guidance, the bank's board was unanimous in today's policy decision compared with December when the bank also raised the rate by 25 basis points but one member voted to raise it by 50 basis points.
       The board said today's hike took into consideration the more restrictive monetary conditions that are expected in North America in order to maintain a stance that anchors inflation expectations and reinforces the downward trend of inflation toward the bank's 3.0 percent target.
       Mexico's inflation rate decelerated to 5.55 percent in January from 6.77 percent in December and Banxico said it expects inflation to continue to ease and approach its 3.0 percent target during the year and then reach it by the first quarter of 2019.
       This is later than the central bank had expected, but it said this delay was due to the impact of the price of some energy products, fruits and vegetables that had pushed up inflation in recent months.

UK central bank holds rate but sees earlier tightening

February 8, 2018 by CentralBankNews   Comments (0)

      The U.K. central bank left its benchmark Bank Rate at 0.50 percent, along with its stock of assets, unchanged but expects to tighten its monetary policy stance "somewhat earlier and by a somewhat greater extent" than earlier expected to rein in inflation as the economy continues to improve.
       The Bank of England (BOE), which already raised its rate by 25 basis points in November last year, raised its forecast for economic growth in the first quarter of this year to 1.7 percent from 1.5 percent forecast in November and the forecast for Q1 2019 to 1.8 percent from 1.7 percent.
       Although the BOE acknowledged that such growth rates are "modest" by historical standards, it exceeds the rate of supply that has been worsened by uncertainty over the U.K. future relationship with the European Union (EU), reducing the slack in the economy and pushing up wages.
       BOE estimates the UK economy has only "a very limited degree of slack" and capacity will only grow around 1.5 percent a year, reflecting lower growth in labour supply and productivity that is around half of its pre-crises average.
       "As growth in demand outpaces that of supply, a small margin of excess demand emerges by early 2020 and builds thereafter," the BOE said.
       Inflation in the U.K. has exceeded the BOE's 2.0 percent target since February 2017 but eased slightly to 3.0 percent in December from 3.1 percent in November.
        The BOE expects inflation to remain around 3.0 percent in the short term due to higher oil prices and the past effects of the fall in the pound's exchange rate that pushed up import prices.
        But while the effect of higher oil prices and sterling's decline slowly dissipate, the BOE expects domestic inflationary pressures to rise as pay growth rises in response to tighter labour markets.
        In the medium term, inflation is expected to remain above the 2.0 percent target.
        In its latest inflation report, the BOE raised its forecast for consumer price inflation to 2.9 percent for the first quarter of this year, up from 2.6 percent, while the outlook for first quarter 2019 inflation was unchanged at 2.3 percent.
        The forecast for the Bank Rate - based on forward market interest rates - was unchanged at 0.5 percent and 0.8 percent for the first quarters of this year and 2019, respectively. But for the first quarter of 2020 the forecast was raised to 1.0 percent from a previous 0.9 percent. For Q1 2021 the Bank Rate is seen at 1.2 percent.
        As in December, the BOE's monetary policy committee was unanimous in today's policy decision, reiterating that future rate increases are expected to be at "a gradual pace and to a limited extent."
        The slightly more hawkish stance by the BOE pushed up sterling against the U.S. dollar to above 1.40 from around 1.38 earlier today, continuing sterling's rise over the last 12 months from around 1.20.

       The Bank of England released the following monetary policy summary:

"The Bank of England’s Monetary Policy Committee (MPC) sets monetary policy to meet the 2% inflation target, and in a way that helps to sustain growth and employment. At its meeting ending on 7 February 2018, the MPC voted unanimously to maintain Bank Rate at 0.5%. The Committee voted unanimously to maintain the stock of sterling non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves, at £10 billion. The Committee also voted unanimously to maintain the stock of UK government bond purchases, financed by the issuance of central bank reserves, at £435 billion.

The MPC’s latest projections for output and inflation are set out in detail in the accompanying February Inflation Report. The global economy is growing at its fastest pace in seven years. The expansion is becoming increasingly broad-based and investment driven. Notwithstanding recent volatility in financial markets, global financial conditions remain supportive. UK net trade is benefiting from robust global demand and the past depreciation of sterling. Along with high rates of profitability, the low cost of capital and limited spare capacity, strong global activity is supporting business investment, although it remains restrained by Brexit-related uncertainties. Household consumption growth is expected to remain relatively subdued, reflecting weak real income growth. GDP growth is expected to average around 13⁄4% over the forecast, a slightly faster pace than was projected in November despite the updated projections being conditioned on the higher market-implied path for interest rates and stronger exchange rate prevailing in financial markets at the time of the forecast.

While modest by historical standards, that rate of growth is still expected to exceed the diminished rate of supply growth. Following its annual assessment of the supply side of the economy, the MPC judges that the UK economy has only a very limited degree of slack and that its supply capacity will grow only modestly over the forecast, averaging around 11⁄2% per year. This reflects lower growth in labour supply and rates of productivity growth that are around half of their pre-crisis average. As growth in demand outpaces that of supply, a small margin of excess demand emerges by early 2020 and builds thereafter.

CPI inflation fell from 3.1% in November to 3.0% in December. Inflation is expected to remain around 3% in the short term, reflecting recent higher oil prices. More generally, sustained above-target inflation remains almost entirely due to the effects of higher import prices following sterling’s past depreciation. These external forces slowly dissipate over the forecast, while domestic inflationary pressures are expected to rise. The firming of shorter-term measures of wage growth in recent quarters, and a range of survey indicators that suggests pay growth will rise further in response to the tightening labour market, give increasing confidence that growth in wages and unit labour costs will pick up to target-consistent rates. On balance, CPI inflation is projected to fall back gradually over the forecast but remain above the 2% target in the second and third years of the MPC’s central projection.

As in previous Reports, the MPC’s projections are conditioned on the average of a range of possible outcomes for the United Kingdom’s eventual trading relationship with the European Union. The projections also assume that, in the interim, households and companies base their decisions on the expectation of a smooth adjustment to that new trading relationship. Developments regarding the United Kingdom’s withdrawal from the European Union – and in particular the reaction of households, businesses and asset prices to them – remain the most significant influence on, and source of uncertainty about, the economic outlook. In such exceptional circumstances, the MPC’s remit specifies that the Committee must balance any trade-off between the speed at which it intends to return inflation sustainably to the target and the support that monetary policy provides to jobs and activity.

Over the past year, a steady absorption of slack has reduced the degree to which it was appropriate for the MPC to accommodate an extended period of inflation above the target. Consequently, at its November 2017 meeting, the Committee tightened modestly the stance of monetary policy in order to return inflation sustainably to the target.

Since November, the prospect of a greater degree of excess demand over the forecast period and the expectation that inflation would remain above the target have further diminished the trade-off that the MPC is required to balance. It is therefore appropriate to set monetary policy so that inflation returns sustainably to its target at a more conventional horizon. The Committee judges that, were the economy to evolve broadly in line with the February Inflation Report projections, monetary policy would need to be tightened somewhat earlier and by a somewhat greater extent over the forecast period than anticipated at the time of the November Report, in order to return inflation sustainably to the target.

In light of these considerations, all members thought that the current policy stance remained appropriate to balance the demands of the MPC’s remit. Any future increases in Bank Rate are expected to be at a gradual pace and to a limited extent. The Committee will monitor closely the incoming evidence on the evolving economic outlook, and stands ready to respond to developments as they unfold to ensure a sustainable return of inflation to the 2% target.

Philipinnes maintains rate but 'watchful' over inflation

February 8, 2018 by CentralBankNews   Comments (0)

     The central bank of the Philippines kept its key policy rate steady at 3.0 percent but said the risks to the inflation outlook remain weighted toward the upside due to possible further rises in oil prices and it was "watchful against any signs of second-round effects and inflation becoming broader based."
      Bangko Sentral ng Pilipinas (BSP), which has maintained its monetary policy stance since September 2014, said it latest forecast shows higher inflation this year but it is still expected to moderate and then settle within the target range of 3.0 percent, plus/minus 1 percentage point.
      But BSP raised its 2018 inflation forecast to 4.3 percent - above its target range - from an earlier 3.4 percent due to higher global oil prices, higher taxes and food prices.
      For 2019 BSP forecasts 3.5 percent inflation, up from 3.2 percent previously forecast.
      Inflation in the Philippines accelerated to a higher-than-expected 4.0 percent in January from 3.3 percent in December, for the highest rate since October 2014, as the cost of food, transport and housing rose.
      Although the BSP has said the rise in inflation is temporary and partly reflects last month's tax increases, economists expect the central bank to raise its rate soon, with some speculating the BSP could have raised its rate today while others are looking toward a March hike.
      Today's statement by the BSP's monetary board is more hawkish than its statement in December when it said it would remain vigilant against any risks to the inflation outlook and will adjust policy settings to ensure inflation is consistent with its target and still supports growth.
       "The monetary board stands ready to take appropriate measures as necessary to ensure that the monetary policy stance continues to support price and financial stability," the BSP said today.
       Interest rates globally are moving upwards in response to solid global growth and three central banks in Asia - South Korea, Malaysia and Pakistan - have already raised their rates in recent months.
       The BSP added that prospects for economic activity continue to be firm on the back of robust domestic demand and the sustained recovery in global economic growth.
       The Philippine economy grew by an annual rate of 6.6 percent in the final quarter of 2017, down from 7.0 percent in the third quarter.

         Bangko Sentral ng Pilipinas issued the following statement:

"At its meeting on monetary policy today, the Monetary Board decided to maintain its policy rate, the interest rate on the BSP’s overnight reverse repurchase (RRP) facility, steady at 3.0 percent. The corresponding interest rates on the overnight lending and deposit facilities were also kept unchanged.
The Monetary Board’s decision is based on its assessment that while latest baseline forecasts show higher inflation outturns for 2018, the inflation path is expected to moderate and settle within the inflation target range of 3.0 percent ± 1.0 percentage point in 2019. The Monetary Board also noted that prospects for domestic activity continue to be firm on the back of robust domestic demand, manageable growth in credit and liquidity, and a sustained recovery in global economic growth. The higher inflation in January is also due to better enforcement of tax laws on tobacco as well as temporary increases in prices of selected food items, such as fish and vegetables.
Nevertheless, the Monetary Board observed that the risks to the inflation outlook remain weighted toward the upside owing mainly to price pressures emanating from possible further increases in global oil prices. At the same time, the Monetary Board saw that inflation expectations continue to be anchored within the inflation target band over the policy horizon. The BSP is watchful against any signs of second-round effects and inflation becoming broader based.
Given these considerations, the Monetary Board reiterates that it remains committed to the BSP’s price stability objective and will continue to closely monitor the evolving conditions for prices and output for any threats to the inflation target. The Monetary Board stands ready to take appropriate measures as necessary to ensure that the monetary policy stance continues to support price and financial stability."

Brazil cuts rate by 25 bps and expects to pause in easing

February 7, 2018 by CentralBankNews   Comments (0)

      Brazil's central bank cut its key Selic interest rate by a further 25 basis points to 6.75 percent, as expected, but said it would now take a pause if the economy evolves as expected after cutting the rate by a total of 7.50 percentage points since embarking on an easing cycle in October 2016.
      But the Central Bank of Brazil's monetary policy committee, known as Copom, didn't completely shut the door on further rate cuts, saying it may still change its view in favor of additional
"moderate" monetary easing if the balance of risks change, and the next step in policy still depends on economic activity, inflation forecasts and expectations.
       Today's rate cut follows the central bank's guidance in December, when it said an "additional moderate reduction of the pace of easing" was appropriate at its meeting in February.
       Copom said its baseline forecast for inflation largely had evolved as expected, with various measures of inflation at "comfortable or low levels."
        Brazil's inflation rate rose slightly to 2.95 percent in December from 2.8 percent in November and the central bank said it was projecting 2018 and 2019 inflation of 4.2 percent, assuming the Selic rate ends this year unchanged at 6.75 percent and then rises to 8.0 percent by end-2019.
       Brazil's economy grew by a better-than expected annual rate of 1.4 percent in the third quarter of last year, up from 0.4 percent in the second quarter, boosted by household spending and exports.
       After rising in the first half of 2016, Brazil's real has been steady since then and was trading at 3.27 to the U.S. dollar today, up 1.2 percent this year.

       The Central Bank of Brazil issued the following statement:

​"The Copom unanimously decided to reduce the Selic rate by 0.25 percentage point, to 6.75 percent per year.
The following observations provide an update of the Copom's baseline scenario:
The set of indicators of economic activity released since the last Copom meeting shows consistent recovery of the Brazilian economy;
The global outlook has been favorable, as economies grow worldwide. This has so far contributed to support risk appetite towards emerging economies, notwithstanding recent volatility of financial conditions in advanced economies;
The Committee judges that its baseline inflation scenario has evolved, to a large extent, as expected. Inflation developments remain favorable, with various measures of underlying inflation running at comfortable or low levels. This includes the components that are most sensitive to the business cycle and monetary policy;
Inflation expectations for 2018 collected by the Focus survey are around 3.9%. Expectations for 2019 and 2020 remain around 4.25% and 4.0%, respectively; and
The Copom's inflation projections in the scenario with interest rate and exchange rate paths extracted from the Focus survey stand around 4.2% for both 2018 and 2019. This scenario assumes a path for the policy interest rate that ends 2018 at 6.75%, and 2019 at 8.0%.
The Committee emphasizes that its baseline scenario involves risks in both directions. On the one hand, the combination of (i) possible second-round effects of the favorable food price shock and of low current levels of industrial goods inflation, and (ii) the possible propagation through inertial mechanisms of low inflation levels may lead to a lower-than-expected prospective inflation trajectory. On the other hand, (iii) frustration of expectations regarding the continuation of reforms and necessary adjustments in the Brazilian economy may affect risk premia and increase the path for inflation over the relevant horizon for the conduct of monetary policy. This risk intensifies in the case of (iv) a reversal of the current benign global outlook for emerging economies.
Taking into account the baseline scenario, the balance of risks, and the wide array of available information, the Copom unanimously decided to reduce the Selic rate by 0.25 percentage point, to 6.75 percent per year. The Committee judges that this decision is consistent with convergence of inflation to target over the relevant horizon for the conduct of monetary policy, which includes 2018 and, with smaller and gradually increasing weight, 2019.
The Committee judges that economic conditions prescribe accommodative monetary policy, i.e., interest rates below the structural level.
The Copom emphasizes that the evolution of reforms and necessary adjustments in the Brazilian economy contributes to the reduction of its structural interest rate. The Committee will continue to reassess estimates of this rate over time.
The evolution of the baseline scenario, in line with expectations, and the stage of the monetary easing cycle made it appropriate to reduce the Selic rate by 0.25 percentage point at this Copom meeting. Regarding the next meeting, provided the Committee's baseline scenario evolves as expected, at this time the Copom views the interruption of the monetary easing process as more appropriate. This view regarding the next Copom meeting might change in favor of an additional moderate monetary easing, if the Committee's baseline scenario or balance of risks change. The Copom emphasizes that the next steps in the conduct of monetary policy will continue to depend on the evolution of economic activity, the balance of risks, possible reassessments of the extension of the cycle, and on inflation forecasts and expectations.
The following members of the Committee voted for this decision: Ilan Goldfajn (Governor), Carlos Viana de Carvalho, Isaac Sidney Menezes Ferreira, Maurício Costa de Moura, Otávio Ribeiro Damaso, Paulo Sérgio Neves de Souza, Reinaldo Le Grazie, Sidnei Corrêa Marques e Tiago Couto Berriel."

Romania raises rate second time as inflation seen rising

February 7, 2018 by CentralBankNews   Comments (0)

      Romania's central bank raised it monetary policy rate for the second month in a row, citing rising inflation amid uncertainties from fiscal policy, the labour market and regulated prices.
      The National Bank of Romania (NBR) raised its rate by another 25 basis points to 2.25 percent and has now raised it by 50 basis points this year following a hike in January, the bank's first rate hike since August 2008, as economic activity improves.
      Romania, the Czech Republic and the U.K. are the first central banks in Europe to raise rates in response to the improving global economy. Global growth has already triggered rate hikes this year in Canada, Malaysia and Pakistan, with the U.S. set to continue tightening its stance in coming months.
      In addition to raising its key policy rate, the NBR also raised the deposit rate to 1.25 percent from 1.0 percent and the Lombard lending rate to 3.25 percent from 3.0 percent.
      Romania's inflation rate rose to 3.3 percent in December from 3.2 percent in November for the highest rate since August 2013.
      Although inflation remains below the NBR's upper tolerance rate of 3.5 percent, the central bank said it was higher than forecast and its latest inflation report "points to prospects for a pick-up in the annual inflation rate in the months ahead, followed by a slowdown starting with the latter part of 2018."
       The NBR targets inflation of 2.5 percent, plus/minus 1 percentage point.
       In November the NBR raised its outlook for inflation to rise to 2.7 percent by the end of 2017 from a previous 1.9 percent, and said inflation may spike to 3.9 percent at the beginning of this year before slowly falling to 3.2 percent by the end of 2018.
       The February inflation report will be published on Feb. 9.
       Economic activity in Romania has also topped expectations as household consumption continues to improve, boosting growth in the third quarter of last year to an annual rate of 8.8 percent. 
       With household consumption rising by 12.5 percent year-on-year - supported by government measures - the central bank noted this pace was similar to pre-crises levels.
        Data for the first two months of the fourth quarter point to a strengthening of the uptrend seen in industrial output, accompanied by a faster rise in new orders across manufacturing, along with high growth in trade and services, the NBR said.

       The National Bank of Romania issued the following statement:

 "In its meeting of 7 February 2018, the Board of the National Bank of Romania decided:

  • to increase the monetary policy rate to 2.25 percent per annum from 2.00 percent per annum as of 8 February 2018;
  • to raise the deposit facility rate to 1.25 percent per annum from 1.00 percent per annum and the lending facility rate to 3.25 percent per annum from 3.00 percent per annum as of 8 February 2018;
  • to maintain the existing levels of minimum reserve requirement ratios on both leu- and foreign currency-denominated liabilities of credit institutions.
In December, the annual inflation rate climbed to 3.32 percent from 3.23 percent in November, standing inside the variation band of the flat target, but higher than the forecast. Behind this evolution stood primarily the step-up in core inflation and, to a small extent, the increase in volatile food prices and tobacco product prices.
The annual adjusted CORE2 inflation rate continued to go up, reaching 2.5 percent in December 2017 versus 2.3 percent in November. Against the background of still rising excess aggregate demand in the economy and growing producer costs (labour force, utilities), the increase affected all categories of goods and services, particularly processed food, which was also hit by some supply-side shocks that were common at a European level.
The average annual CPI inflation rate continued to advance up to 1.3 percent in December 2017 from 1.0 percent in November; calculated based on the Harmonised Index of Consumer Prices, the annual average stood at 1.1 percent, up from 0.9 percent in the previous month.
The revised data on third-quarter economic growth reconfirm the fast real GDP dynamics, i.e. 8.8 percent. The major driver of growth was household consumption (8.3 percentage points), whose annual pace of increase stepped up considerably to 12.5 percent, similar to the pre-crisis levels. The expansion in consumption was fostered by the income-boosting measures implemented as from 1 July 2017, which overlapped with the favourable financial conditions, and by the stimulative labour market conditions. In 2017 Q3, gross fixed capital formation also made a positive contribution to economic growth (2.1 percentage points).
The contribution of net exports to GDP growth remained in negative territory. The current account deficit widened at a swifter annual rate, amid the larger negative balance on trade in goods.
Statistical data for the first two months of the final quarter of 2017 point to a strengthening of the uptrend seen in industrial output, accompanied by a swifter advance in new orders across manufacturing and further high growth rates of the activity in trade and services, against the backdrop of an increase in net real average wage. The trade deficit continued to worsen, as the annual growth rate of imports still outpaced that of exports.
Credit to the private sector continued its robust growth in December 2017, at an annual rate of 5.6 percent, given that the leu-denominated component increased by 15.8 percent in annual terms, its share in total credit widening to 62.8 percent (from a 34.6 percent low in May 2012).
In today’s meeting, the NBR Board examined and approved the February 2018 Inflation Report, which incorporates the most recent data and information available. The new scenario of the projection points to prospects for a pick-up in the annual inflation rate in the months ahead, followed by a slowdown starting with the latter part of 2018. Thus, compared to the previous Inflation Report, the path of the forecasted annual inflation rate has been revised upwards in the short run, mainly due to the relative strengthening of recent and anticipated inflationary effects of supply-side factors, as well as to pressures from fundamentals.
The uncertainties and risks surrounding this outlook stem primarily from the fiscal and income policy stance, labour market conditions, as well as from developments in administered prices.
Looking at the external environment, relevant are the uncertainties and risks regarding the volatility of international financial markets, the developments in oil and agri-food prices, as well as the pace of economic growth in the euro area and worldwide, also amid the normalisation of the monetary policy stances of the major central banks.
Given the current assessments, the information available at present, as well as the new sources of uncertainty, the Board of the National Bank of Romania decided to increase the monetary policy rate to 2.25 percent per annum from 2.00 percent per annum; moreover, the NBR Board decided to raise the deposit facility rate to 1.25 percent per annum and the lending (Lombard) facility rate to 3.25 percent per annum. In addition, the NBR Board decided to maintain the existing levels of minimum reserve requirement ratios on both leu- and foreign currency-denominated liabilities of credit institutions.
The NBR Board decisions aim to ensure and preserve price stability over the medium term in a manner conducive to achieving sustainable economic growth. The NBR Board underlines that the balanced macroeconomic policy mix and progress in structural reforms are of the essence in preserving a stable macroeconomic framework and strengthening the capacity of the Romanian economy to withstand potential adverse developments.
The NBR is closely monitoring domestic and external developments and stands ready to use all its available tools with a view to fulfilling its primary objective. The new quarterly Inflation Report will be presented to the public in a press conference on 9 February 2018. The account (minutes) of discussions underlying the adoption of the monetary policy decision during today’s meeting will be posted on the NBR website on 14 February 2018, at 3:00 p.m.
The next monetary policy meeting of the NBR Board is scheduled for 4 April 2018."

India holds rate, neutral stance, ups inflation outlook

February 7, 2018 by CentralBankNews   Comments (0)

      India's central bank left its benchmark repo rate at 6.0 percent, as widely expected, but surprised many analysts by maintaining a neutral policy stance despite raising its forecast for inflation and saying the risks were to the upside.
      The Reserve Bank of India (RBI), which has maintained its rate since cutting it by 25 basis points in August 2017, said the outlook for inflation was clouded by several uncertainties on the upside that called for "vigilance," but on the other side there were also several mitigating factors.
       Illustrating this uncertain outlook for inflation, the RBI's monetary policy committee was split in its decision, with five members voting to maintain rates while one member, Michael Debabrata Patra, voting for a hike of 25 basis points.
       At its previous meeting in December, five members had also voted to maintain the rate, including Patra, while one member had voted to reduce the rate.
        The RBI's policy decision comes only days after India's government published its budget for the 2018/19 financial year, which begins April 1, which boosts spending by 13.2 percent on healthcare and infrastructure, especially in rural areas.
       The budget targets a fiscal deficit of 3.3 percent of Gross Domestic Product in 2018/19, up from a previous target of 3.0 percent and an estimated 3.5 percent deficit this year.
       The RBI welcomed the budget's focus on infrastructure and rural sectors as this would boost incomes, investment and thus demand and economic activity.
       "On the downside, the deterioration in public finances risks crowding out of private financing and investment," the RBI said, echoing concerns in financial markets where India's 10-year bond yield has risen steadily since September last year to 7.57 percent today.
        In his budget, Finance Minister Jaitley forecast 2018/19 growth of 7.2 percent, a forecast the RBI reiterated, adding growth in the first half of the year would be 7.3-7.4 percent and then 7.1-7.2 percent in the second half, with risks evenly balanced.
        Growth in the current 2017/18 year, which ends March 30, growth is projected at 6.6 percent, slightly below earlier forecasts of 6.7 percent, as the economy recovers after being hit by the government's surprise decision in November 2016 to ban 500 and 1,000 rupee notes - around 86 percent of currency in circulation.
       While the aim of the note ban was to root out corruption and tax evasion, it dented consumer demand and cash-sensitive sectors, such as retail, hotels, restaurants and transportation.
      Growth in the 2016/17 financial year slowed to 7.1 percent from 8.2 percent in the previous year.
      India's inflation rate rose to a higher-than-expected 5.21 percent in December, the highest since July 2016, and above November's 4.88 percent, when inflation topped the RBI's target of 4.0 percent.
       Citing a range of uncertainties, the RBI raised its forecast for inflation in the current quarter to 5.1 percent from the previous forecast of 4.3 to 4.7 percent.
        For 2018/19 inflation is estimated in a range of 5.1-5.6 percent in the first half of the year, and 4.5-4.6 percent in the second half, with risks tilted to the upside.
     The RBI has a tolerance range of plus/minus 2 percentage points around the 4.0 percent midpoint.

      The Reserve Bank of India issued the following statement:

"On the basis of an assessment of the current and evolving macroeconomic situation at its meeting today, the Monetary Policy Committee (MPC) decided to:
  • keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 6.0 per cent.
Consequently, the reverse repo rate under the LAF remains at 5.75 per cent, and the marginal standing facility (MSF) rate and the Bank Rate at 6.25 per cent.
The decision of the MPC is consistent with the neutral stance of monetary policy in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth. The main considerations underlying the decision are set out in the statement below.
2. Since the MPC’s last meeting in December 2017, global economic activity has gained further pace with growth impulses becoming more synchronised across regions. Among advanced economies (AEs), the Euro area expanded at a robust pace, supported by consumption and investment. Economic optimism alongside falling unemployment and low interest rates are supporting the recovery. The US economy lost some momentum with growth slowing down in Q4 of 2017 even as manufacturing activity touched a multi-month high in December. The Japanese economy continued to grow as manufacturing activity gathered pace in January on strong external demand, providing fillip to the already bullish business confidence.
3. Economic activity accelerated in emerging market economies (EMEs) in the final quarter of 2017. The Chinese economy grew above the official target, driven by strong domestic consumption and robust exports. However, some downside risks to growth remain, especially from easing fixed asset investment and surging debt levels. In Russia, strong private consumption, rising oil prices and high exports are supporting economic activity, although weak investment and economic sanctions are weighing on its growth prospects. In Brazil, data on household spending and unemployment were positive in Q4. However, recovery remains vulnerable to political uncertainty, which has dampened consumer confidence. South Africa continues to face challenges on both domestic and external fronts, including high unemployment and declining factory activity.
4. Global trade continued to expand, underpinned by strong investment and robust manufacturing activity. Crude oil prices touched a three-year high as production cuts by the OPEC coupled with falling inventories weighed on the global demand-supply balance. Bullion prices touched a multi-month high on a weak US dollar. Inflation remained contained in most AEs, barring the UK, on subdued wage pressures. Inflation was divergent in key EMEs due to country-specific factors.
5. Financial markets have become volatile in recent days due to uncertainty over the pace of normalisation of the US Fed monetary policy in view of January payrolls data showing rapidly accelerating wage growth and better than expected employment. The volatility index (VIX) has climbed to its highest level since Brexit. Equity markets have witnessed a sharp correction, both in AEs and EMEs. Bond yields in the US have hardened sharply, adding to the upward pressures seen during January, with concomitant rise in bond yields in other AEs and EMEs. Forex markets have become volatile as well. Until this episode of recent volatility, global financial markets were buoyed by investor appetite for risk, corporate tax cuts by the US, and stable economic conditions. Equity markets had gained significantly in January, driven by robust Chinese growth, uptick in commodity prices, and positive corporate sentiment in general. In currency markets, the US dollar had touched a multi-month low on February 1 on fiscal risks and improving growth prospects in other AEs.
6. On the domestic front, the real gross value added (GVA) growth as per the first advance estimates (FAE) released by the Central Statistics Office (CSO) is estimated to decelerate to 6.1 per cent in 2017-18 from 7.1 per cent in 2016-17 due mainly to slowdown in agriculture and allied activities, mining and quarrying, manufacturing, and public administration and defence (PADO) services.
7. Information available after the release of FAE by the CSO has, however, been generally positive. Manufacturing output boosted the growth of index of industrial production (IIP) in November. After a period of prolonged weakness, cement production registered robust growth in November-December, which along with continuing healthy growth in steel production led to acceleration of infrastructure goods production in November. The manufacturing purchasing managers’ index (PMI) expanded for the sixth consecutive month in January led by new orders. Assessment of overall business sentiment in the Indian manufacturing sector improved in Q3 as reflected in the Reserve Bank’s Industrial Outlook Survey (IOS). However, core sector growth decelerated in December due to contraction/deceleration in production of coal, crude oil, steel and electricity. Acreage in the case of wheat, oilseeds and coarse cereals was lower than last year. As a result, the shortfall in area sown for rabi crops increased to (-)1.5 per cent as on February 2 as compared with (-)1.0 per cent on December 29, 2017.
8. In the services sector, some of the high frequency indicators improved. Commercial vehicle sales growth touched an eight-year high in December. Cargo carried by sea, rail and air also registered higher growth in November, but showed mixed performance in December. Other indicators such as domestic and international air passenger traffic and foreign tourist arrivals grew at a fast pace in November-December. The services PMI expanded sequentially in December and January on the back of higher business activity.
9. Retail inflation, measured by the year-on-year change in the consumer price index (CPI), increased for the sixth consecutive month in December on account of a strong unfavourable base effect. After rising abruptly in November, food prices reversed partly in December, reflecting mainly the seasonal moderation, albeit muted, in prices of vegetables along with continuing decline in prices of pulses. Cereals inflation moderated with prices remaining steady in December. However, inflation in some components of food – eggs; meat and fish; oils and fats; and milk – increased. Fuel and light group inflation, which showed a sharp increase in November, softened somewhat in December, driven by moderation in electricity, LPG and kerosene inflation.
10. CPI inflation excluding food and fuel increased further in November and December, largely on account of increase in housing inflation following the implementation of higher house rent allowances (HRA) for government employees under the 7th central pay commission (CPC) award. Inflation also picked up in health and personal care and effects. Reflecting incomplete pass-through to domestic petroleum product prices, inflation in transport and communication remained muted in December. Inflation also slowed down in clothing and footwear, household goods and services, recreation, and education.
11. Households’ inflation expectations, measured by the Reserve Bank’s survey of households, remained elevated for both three-month ahead and one-year ahead horizons even as inflation expectation for one-year ahead horizon moderated marginally. Firms responding to the Reserve Bank’s Industrial Outlook Survey (IOS) continued to report input price pressures and increase in selling prices in Q3. This is also confirmed by manufacturing and services firms polled by PMI. Organised sector wage growth remained firm, while the rural wage growth decelerated.
12. The liquidity in the system continues to be in surplus mode, but it is moving steadily towards neutrality. The weighted average call rate (WACR) traded 12 basis points (bps) below the repo rate during December-January as against 15 bps below the repo rate in November. On some days in December and January, the system turned into deficit due to slow down in government spending and large tax collections, which necessitated injection of liquidity by the Reserve Bank. During the two weeks beginning December 16, 2017, the Reserve Bank injected average daily net liquidity of ₹ 388 billion into the system. For December as a whole, however, the Reserve Bank absorbed ₹ 316 billion (on a net daily average basis). As the system turned into deficit again in the fourth week of January, the Reserve Bank injected average net liquidity of ₹ 145 billion. For January, on the whole, the Reserve Bank absorbed ₹ 353 billion (on a net daily average basis).
13. Merchandise exports bounced back in November and December. While petroleum products, engineering goods and chemicals accounted for three-fourths of this growth, exports of readymade garments contracted. During the same period, merchandise import growth accelerated sequentially with over one-third of the growth emanating from petroleum (crude and products) due largely to high international prices. Gold imports increased – both in value and volume terms – in December, after declining in the preceding three months. Pearls and precious stones, electronic goods and coal were major contributors to non-oil non-gold import growth. With import growth exceeding export growth, the trade deficit for December was US$ 14.9 billion.
14. Even though the current account deficit narrowed sharply in Q2 of 2017-18 on a sequential basis, it was higher than its level a year ago, mainly due to widening of the trade deficit. While net foreign direct investment (FDI) inflows moderated in April-October 2017 from their level a year ago, net foreign portfolio investment (FPI) inflows were buoyant in 2017-18 (up to February 1). India’s foreign exchange reserves were at US$ 421.9 billion on February 2, 2018.
15. The December bi-monthly resolution projected inflation in the range of 4.3-4.7 per cent in the second half of 2017-18, including the impact of increase in HRA. In terms of actual outcomes, headline inflation averaged 4.6 per cent in Q3, driven primarily by an unusual pick-up in food prices in November. Though prices eased in December, the winter seasonal food price moderation was less than usual. Domestic pump prices of petrol and diesel rose sharply in January, reflecting lagged pass-through of the past increases in international crude oil prices. Considering these factors, inflation is now estimated at 5.1 per cent in Q4, including the HRA impact.
16. The inflation outlook beyond the current year is likely to be shaped by several factors. First, international crude oil prices have firmed up sharply since August 2017, driven by both demand and supply side factors. Second, non-oil industrial raw material prices have also witnessed a global uptick. Firms polled in the Reserve Bank’s IOS expect input prices to harden in Q4. In a scenario of improving economic activity, rising input costs are likely to be passed on to consumers. Third, the inflation outlook will depend on the monsoon, which is assumed to be normal. Taking these factors into consideration, CPI inflation for 2018-19 is estimated in the range of 5.1-5.6 per cent in H1, including diminishing statistical HRA impact of central government employees, and 4.5-4.6 per cent in H2, with risks tilted to the upside (Chart 1). The projected moderation in inflation in the second half is on account of strong favourable base effects, including unwinding of the 7th CPC’s HRA impact, and a softer food inflation forecast, given the assumption of normal monsoon and effective supply management by the Government.
17. Turning to the growth outlook, GVA growth for 2017-18 is projected at 6.6 per cent. Beyond the current year, the growth outlook will be influenced by several factors. First, GST implementation is stabilising, which augurs well for economic activity. Second, there are early signs of revival in investment activity as reflected in improving credit offtake, large resource mobilisation from the primary capital market, and improving capital goods production and imports. Third, the process of recapitalisation of public sector banks has got underway. Large distressed borrowers are being referenced for resolution under the Insolvency and Bankruptcy Code (IBC). This should improve credit flows further and create demand for fresh investment. Fourth, although export growth is expected to improve further on account of improving global demand, elevated commodity prices, especially of oil, may act as a drag on aggregate demand. Taking into consideration the above factors, GVA growth for 2018-19 is projected at 7.2 per cent overall – in the range of 7.3-7.4 per cent in H1 and 7.1-7.2 per cent in H2 – with risks evenly balanced (Chart 2).
18. The MPC notes that the inflation outlook is clouded by several uncertainties on the upside. First, the staggered impact of HRA increases by various state governments may push up headline inflation further over the baseline in 2018-19, and potentially induce second-round effects. Second, a pick-up in global growth may exert further pressure on crude oil and commodity prices with implications for domestic inflation. Third, the Union Budget 2018-19 has proposed revised guidelines for arriving at the minimum support prices (MSPs) for kharif crops, although the exact magnitude of its impact on inflation cannot be fully assessed at this stage. Fourth, the Union Budget has also proposed an increase in customs duty on a number of items. Fifth, fiscal slippage as indicated in the Union Budget could impinge on the inflation outlook. Apart from the direct impact on inflation, fiscal slippage has broader macro-financial implications, notably on economy-wide costs of borrowing which have already started to rise. This may feed into inflation. Sixth, the confluence of domestic fiscal developments and normalisation of monetary policy by major advanced economies could further adversely impact financing conditions and undermine the confidence of external investors. There is, therefore, need for vigilance around the evolving inflation scenario in the coming months.
19. There are also mitigating factors. First, capacity utilisation remains subdued. Second, oil prices have moved both ways in the recent period and can potentially soften from current levels based on production response. Third, rural real wage growth is moderate.
20. Accordingly, the MPC decided to keep the policy repo rate on hold and continue with the neutral stance. The MPC reiterates its commitment to keep headline inflation close to 4 per cent on a durable basis.
21. The MPC notes that the economy is on a recovery path, including early signs of a revival of investment activity. Global demand is improving, which should help strengthen domestic investment activity. The focus of the Union Budget on the rural and infrastructure sectors is also a welcome development as it would support rural incomes and investment, and in turn provide a further push to aggregate demand and economic activity. On the downside, the deterioration in public finances risks crowding out of private financing and investment. The Committee is of the view that the nascent recovery needs to be carefully nurtured and growth put on a sustainably higher path through conducive and stable macro-financial management.
22. Dr. Chetan Ghate, Dr. Pami Dua, Dr. Ravindra H. Dholakia, Dr. Viral V. Acharya and Dr. Urjit R. Patel voted in favour of the monetary policy decision. Dr. Michael Debabrata Patra voted for an increase in the policy rate of 25 basis points. The minutes of the MPC’s meeting will be published by February 21, 2018.

23. The next meeting of the MPC is scheduled on April 4 and 5, 2018."

Australia holds rate, sees growth 'a bit above' 3 percent

February 6, 2018 by CentralBankNews   Comments (0)

      Australia's central bank left its benchmark cash rate at 1.50 percent, as expected, but inched up its outlook for economic growth over the next couple of years to "a bit above 3 percent," on positive business conditions and further improvement in the outlook for non-mining business investment.
       The Reserve Bank of Australia (RBA), which has kept its rate steady since lowering it in August 2016, also said it remains optimistic that unemployment will continue to fall and inflation will return to target although "this progress is likely to be gradual."
       Today's statement by RBA Governor Philip Lowe that growth will be over 3 percent in coming years compares with its last statement from December when it said growth was expected to average around 3 percent over the next few years.
        Lowe added recent economic data is consistent with this outlook for growth and increased public investment in infrastructure is also supporting the economy. The outlook for household consumption, however, is uncertain as incomes are only growing slowly and debt remains high.
       Australia's economy has been benefitting from rising demand for its raw materials on the back of an improving global economy, with Gross Domestic Product up by an annual rate of 2.8 percent in the third quarter of last year, up from 1.9 percent in the second quarter.
       Inflation in Australia has remained subdued in the last few years with the headline rate up to 1.9 percent in the last quarter of 2017 from 1.8 percent in the third quarter.
       The RBA said inflation is likely to remain low for some time but then gradually pick up as the economy strengthens.
       "The central forecast is for CPI inflation to be a bit above 2 per cent in 2018," Lowe said.
        The RBA targets inflation of 2-3 percent.
       As in recent months, Lowe cautioned that the rise in the exchange rate of the Australian dollar, known as the Aussie, would likely result in a slower pick-up in economic activity and inflation than currently forecast.
       The Aussie, has been firming steadily since January 2016 although it has fallen in recent days. Nevertheless it remains 0.8 percent higher than at the beginning of this year at 1.27 to the U.S. dollar and up 9.5 percent since the start of 2017.

       The Reserve Bank of Australia issued the following statement by its governor, Philip Lowe:

"At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent.
There was a broad-based pick-up in the global economy in 2017. A number of advanced economies are growing at an above-trend rate and unemployment rates are low. Growth has also picked up in the Asian economies, partly supported by increased international trade. The Chinese economy continues to grow solidly, with the authorities paying increased attention to the risks in the financial sector and the sustainability of growth.
The pick-up in the global economy has contributed to a rise in oil and other commodity prices over recent months. Even so, Australia's terms of trade are expected to decline over the next couple of years, but remain at a relatively high level.
Globally, inflation remains low, although higher commodity prices and tight labour markets are likely to see inflation increase over the next couple of years. Long-term bond yields have risen but are still low. As conditions have improved in the global economy, a number of central banks have withdrawn some monetary stimulus. Financial conditions remain expansionary, with credit spreads narrow.
The Bank's central forecast for the Australian economy is for GDP growth to pick up, to average a bit above 3 per cent over the next couple of years. The data over the summer have been consistent with this outlook. Business conditions are positive and the outlook for non-mining business investment has improved. Increased public infrastructure investment is also supporting the economy. One continuing source of uncertainty is the outlook for household consumption. Household incomes are growing slowly and debt levels are high.
Employment grew strongly over 2017 and the unemployment rate declined. Employment has been rising in all states and has been accompanied by a significant rise in labour force participation. The various forward-looking indicators continue to point to solid growth in employment over the period ahead, with a further gradual reduction in the unemployment rate expected. Notwithstanding the improving labour market, wage growth remains low. This is likely to continue for a while yet, although the stronger economy should see some lift in wage growth over time. There are reports that some employers are finding it more difficult to hire workers with the necessary skills.
Inflation is low, with both CPI and underlying inflation running a little below 2 per cent. Inflation is likely to remain low for some time, reflecting low growth in labour costs and strong competition in retailing. A gradual pick-up in inflation is, however, expected as the economy strengthens. The central forecast is for CPI inflation to be a bit above 2 per cent in 2018.
On a trade-weighted basis, the Australian dollar remains within the range that it has been in over the past two years. An appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast.
Nationwide measures of housing prices are little changed over the past six months, with prices having recorded falls in some areas. In the eastern capital cities, a considerable additional supply of apartments is scheduled to come on stream over the next couple of years. To address the medium-term risks associated with high and rising household indebtedness, APRA introduced a number of supervisory measures. Tighter credit standards have also been helpful in containing the build-up of risk in household balance sheets.
The low level of interest rates is continuing to support the Australian economy. Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual. Taking account of the available information, the Board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time."