Reserve Bank of Australia Monthly Policy Statement

Release Explanation: This is the quarterly release from the Reserve Bank of Australia. It contains pertinent articles, speeches, statistical data, and other detailed analysis of current and future economic conditions that are present or might be in the near term for the Australian economy.

Trade Desk Thoughts: The Reserve Bank of Australia has stated in its quarterly report that:
• Almost all developed countries recorded a decline in output in the December quarter, and most appear to have experienced a further decline in the March quarter. Growth also slowed significantly in all emerging market countries.

• The sharp and synchronized nature of the downturn is largely accounted for by the substantial falls in consumer and business confidence that followed the financial events in September 2008, including the failure of Lehman Brothers in the United States. As confidence declined and uncertainty and risk aversion increased, both consumers and businesses delayed or cancelled their spending and production plans, especially for consumer durables and capital goods. Credit conditions simultaneously tightened considerably around the world, as severe strains developed in the global financial system.
 
• While the recent GDP outcomes for most countries have been very weak, there are signs that the rate of contraction in output is abating. It is likely that the half year to the March quarter will prove to have been the period of greatest contraction, with the IMF’s recently revised forecasts consistent with a modest increase in global GDP over the second half of 2009.
 
• The improvement in sentiment is also evident in commodity markets. After the very large falls in the second half of last year, the prices of many commodities, including base metals, have strengthened a little over recent months. While Australia’s terms of trade are declining as lower contract prices take effect, they are expected to hold up at a high level.

• Although sentiment in many markets and the economy more generally has improved, confidence is still clearly vulnerable to setbacks, especially the possibility of more unexpected losses by financial institutions. As has been the case for some time, prospects for a sustained recovery in the United States, in particular, depend critically on a resolution of the current problems in the financial sector.
 
• Overall, the marked deterioration in the global economy in the latter part of 2008 and early this year has led to considerable slowing in the Australian economy. While near-term outcomes are likely to be weak, there are reasonable grounds to expect that a recovery will begin by the end of the year, provided global conditions continue to stabilise. The recovery, however, is likely to be gradual at first, largely reflecting developments abroad, where growth is forecast to be below trend for some time.

• The Board has responded to the deterioration in the global and domestic environment that has taken place since September 2008 by easing monetary policy significantly. Short-term interest rates are currently at their lowest level since the early 1960s. Much of this easing took place in expectation of the current weak economic conditions and before the emergence of clear evidence that inflation was declining. Together with the substantial fiscal initiatives, the lower interest rates are providing significant support to domestic demand, and will continue to do so over the period ahead. 

Forex technical Reaction: The release of the RBA monetary policy statement has had no effect on the aussie, so far. The pair is virtually unchanged since the start of the Asian session, trading near the 0.7530 level.