RBA signals end of easing cycle as Fed tapering continues

The Reserve Bank of Australia (RBA) on Tuesday announced to keep the official cash rate unchanged in its first statement on monetary policy for the year 2014, it also implied that it has shifted its easing emphasis towards a neutral monetary policy.

"In the Board's judgment, monetary policy is appropriately configured to foster sustainable growth in demand and inflation outcomes consistent with the target," RBA governor Glenn Stevens said in a statement. "On present indications, the most prudent course is likely to be a period of stability in interest rates."

This could mean that the easing cycle has come to an end.

"They've clearly moved towards a more neutral stance of monetary policy and it's going to really put the burden on the data over the next few months if we are going to see the RBA ease policy any further," JP Morgan economist Tom Kennedy said.

The RBA's decision was forecast by most economists. The unexpected spike in consumer prices in the last quarter of 2013, along with strong growth in the housing prices, makes the RBA very hard to carry out more easing policies.

The Aussie dollar gained almost 2 percent after the release of the Central Bank's statement. RBA's decision surely surprised some investors as they continued to cover their short position on Aussie dollar in the following trading session to push it even higher.

The Australian dollar fell below 90 U.S. cents in recent weeks. The central bank governor is pleased to see this result.

"The exchange rate has declined further, which, if sustained, will assist in achieving balanced growth in the economy," Stevens said.

Meanwhile, the U.S. Federal Reserve welcomed its first woman chairman as Janet Yellen took office this Monday. A new chairwoman will not change the Fed's tapering plan as there is "substantial improvement" in American labor market indicators since the program started in late 2012.

The central bank's Federal Open Market Committee decided last week to reduce its bond-buying again by 10 billion U.S. dollars, after the 10 billion cut in December.

"I supported both decisions because they are consistent with the linkage the Committee established between the asset purchase program and the outlook for labor market conditions," Federal Reserve Bank of Richmond President Jeffrey Lacker said on Tuesday.

The pull-back of stimulus by the Fed is causing pain in emerging markets. In the past few weeks, people have seen the single biggest sell-off in emerging market currencies since 2009. The Argentine peso plummeted 15 percent in a single day on Jan. 23.

The financial storm quickly spread to Turkey, South Africa, and Russia. Even developed markets suffered -- Nikkei 225 Stock Average drop nearly 14 percent from its December 30 high.

It is inevitable that some countries which rely on cheap funding in the past few years will suffer a lot in economic growth as Fed gradually quits easing. Australia may also be affected by the slowdown of emerging markets.

The RBA is comfortable to stay where it is now before more data on the overall economy are available in coming months to decide whether to change its current policies.