Markets

RBA holds rates, warns on strong Aussie dollar

RBA holds rates, warns on strong Aussie dollar

Reserve Bank of Australia Governor Philip Lowe said on Tuesday the bank board had chose to leave the cash rate at 1.5 per cent, where it has now been for 12 months. Citing complications to the evolution of the economy, the statement went further to explicitly address commonly held fears in respect to the deflationary impact of the elevated Aussie which the bank believes will "contribute to subdued price pressures" and have a knock on effect on the wider economy through employment and exports.

The decision at Tuesday's board meeting comes ahead of the release of the RBA's Quarterly Statement on Monetary Policy on Friday, which is expected to explain more of the board's rationale. Although jobs growth is picking up and the unemployment rate is expected to edge lower over the next couple of years, wages growth remains feeble. According to RBA, one source of uncertainty for domestic economy is the outlook for consumption.

In his statement, Dr Lowe said that although retail sales had picked up recently, "slow growth in real wages and high levels of household debt are likely to constrain growth in spending".

"The Australian dollar has appreciated recently, partly reflecting a lower United States dollar". The various forward-looking indicators point to continued growth in employment over the period ahead.

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The central bank kept its benchmark rate at 1.5% yesterday, as expected. "Recent declines in the USA dollar and strengthening commodity prices have placed added pressure on the Australian dollar, which may reduce export demand".

An appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than now forecast, the bank said. But Dr Lowe noted that "a factor working in the other direction is increased competition from new entrants in the retail industry".

"In the eastern capital cities, a considerable additional supply of apartments is scheduled to come on stream over the next couple of years", Lowe said. The weakness remains household debt - at a record 190% of income and among the world's highest - which is still outpacing income growth. While some economists might argue high iron ore and coal prices justify a stronger Aussie dollar, the reality is mining companies aren't going to use the windfalls to invest and hire Down Under.

Meanwhile, the S&P/ASX 200 index traded 0.35 percent lower at 5,690.50 by 03:50 GMT, while at 03:00GMT, the FxWirePro's Hourly AUD Strength Index remained neutral at -11.95 (a reading above +75 indicates a bullish trend, while that below -75 a bearish trend).


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