RBA leaves official cash rate at 2pc

The RBA has kept rates steady for a 10th straight meeting. Photo: Nicholas RiderThe Reserve Bank of Australia has kept the official cash rate at a record low 2 per cent for a 10th straight meeting, but warned that the recent strong rise in the Australian dollar could “complicate” the economy’s transition.
Nanjing Night Net

In a statement following the central bank’s meeting on Tuesday, RBA governor Glenn Stevens said low inflation would facilitate another rate cut if that were necessary.

“Continued low inflation would provide scope for easier policy, should that be appropriate to lend support to demand,” Mr Stevens said, in a carbon copy of the previous month’s statement.

While the decision to keep rates unchanged was widely expected, analysts were speculating that the governor would show some concern about the recent steep rise in the Australian dollar’s exchange rate, which gained nearly 12 per cent from its January lows to a peak of US77.23¢ last week.

Mr Stevens duly added a paragraph to this month’s statement, noting that the currency had appreciated “somewhat”.

“In part, this [the recent rise] reflects some increase in commodity prices, but monetary developments elsewhere in the world have also played a role,” he said, referring to recent monetary easing by other central banks including the Bank of Japan and the European Central Bank, as well as the decision by the US Federal Reserve to reduce the pace of interest rate hikes.

“Under present circumstances, an appreciating exchange rate could complicate the adjustment under way in the economy,” he added.

But anyone hoping for a stronger “jawbone” was disappointed and the Australian dollar shot up by about half a cent to the day’s high of US76.32¢, before falling back in late trade to around US76¢.

“The market was looking for some intensification of rhetoric on the currency, and the RBA went some way to meeting expectations,” said JPMorgan head of interest rate strategy Sally Auld.

“But with the currency only around 1.5 per cent overvalued relative to fair value at present, it was never likely that the RBA would deliver an aggressive shift in rhetoric.”

Bets on future rate cuts fell slightly, with markets pricing in a 29 per cent chance of a cut at the May meeting, moving up to a 58 per cent chance in July.

If the Reserve Bank were to cut rates it would be because the global economy was deteriorating or because the dollar kept running on despite and ahead of fundamentals such as commodity prices, said CommSec chief economist Craig James, who expects rates to stay on hold “for the foreseeable future”.

“The Reserve Bank governor said there was the risk that the Aussie dollar was getting ahead of itself. But no doubt the Reserve Bank believes that this is a temporary phenomenon,” Mr James said.

But if the currency were to defy expectations of coming back from current levels, then the RBA’s discomfort would grow, Ms Auld said.

“However, the case for any policy response will take time to build and will be contingent upon both persistent over-valuation in the Australian dollar and evidence of weakness in activity data,” she said.

“This implies any easing, should it be forthcoming, is a proposition for the second half ot 2016, and today’s statement is consistent with this view.”

Apart from the comments on the exchange rate, there were only minor changes to the April statement from last month’s.

ANZ head of Australian economics Felicity Emmett said the RBA seemed slightly less worried about the global outlook, while domestically there was little change to the characterisation of the economy.

Mr Stevens noted that “the available information suggests that the economy is continuing to rebalance following the mining investment boom”.

“Looking forward, while the RBA’s concerns over the global outlook seem to have abated somewhat, the strengthening of the dollar and the resulting implications for the non-mining recovery will be important to watch,” Ms Emmett said.

This story Administrator ready to work first appeared on Nanjing Night Net.

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