RBA: Volatility Increasing

RBA leaves the cash rate at 2.5% and warns "market volatility increasing"

Reserve Bank of Australia (RBA) decided to leave the official cash rate on hold at 2.5% in its October meeting and warned that volatility has gathered momentum in financial markets.

RBA governor Glenn Stevens commented that growth in the global economy is continuing at a moderate pace and commodity prices in historical terms remain high, but some of those important to Australia have declined further in recent months.

"Volatility in some financial markets has picked up in recent weeks. Overall, however, financial conditions remain very accommodative. Long-term interest rates and risk spreads remain very low," he said.

"Markets still appear to be attaching a low probability to any rise in global interest rates or other adverse event over the period ahead."

Stevens explained that in Australia, most data is consistent with moderate growth in the economy, and resources sector investment spending is starting to decline significantly, while some other areas of private demand are seeing expansion, at varying rates.

Overall, the RBA still expects growth to be a little below trend for the next several quarters.

"Labour market data have been unusually volatile of late. The Bank's assessment remains that although some forward indicators of employment have been firming this year, the labour market has a degree of spare capacity and it will probably be some time yet before unemployment declines consistently," Stevens said.

Growth in wages has declined noticeably and is expected to remain relatively modest over the period ahead, which should keep inflation consistent with the target even with lower levels of the exchange rate.

Stevens added that, in the RBA's judgement, monetary policy is appropriately configured to foster sustainable growth in demand and inflation outcomes consistent with the target, and "on present indications, the most prudent course is likely to be a period of stability in interest rates."

The RBA statement also made reference to investors continuing to look for higher returns in response to low rates on safe instruments, and the increase in dwelling prices continuing along with the increase in residential credit growth.