RBA Keeps Policy Rate Steady

Weekly AUDUSD

The Australian dollar bought 80.25 USA cents at 3:25 p.m.in Sydney compared with 80.19 cents before the statement detailing the board's decision to hold the cash rate at 1.5 percent. The higher exchange rate is expected to contribute to subdued price pressures in the economy.

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.

After all the speculation over the past fortnight the Reserve Bank Board has reiterated that it is comfortably on the interest rate sidelines.

He said Dr Lowe's statement "effectively says that a stronger Australian dollar amounts to a de facto monetary policy tightening which threatens the RBA's growth forecasts". And policymakers have used the latest setting to provide a sense of calm and structured thought to the outlook for interest rates and the economy.

The Reserve Bank of Australia (RBA) kept its interest rate steady for the 11 consecutive month on Tuesday, confirming market expectations and completing a full year without any changes in its monetary stimulus.

But HSBC Australia chief economist Paul Bloxham - who is expecting a cash rate hike early in 2018 - disagreed that the currency's strength would stay the RBA's hand.

The warning had little effect on the currency, however, which remained stubbornly above 80 USA cents.




Instead, he said, "the post-meeting statement reported that the forecasts were largely unchanged and that growth was still expected to pick up to around 3 per cent". We suspect another year of masterly inactivity is in store from here.

Recent strong GDP data is probably not going to be enough to encourage a rate rise, despite coming out up by 0.3% on the previous month - against 0.2% forecast - and 1.7% higher on an annualized basis as this is still well below the rate of inflation which is circa 2.7%.

Developments in the wider market could also help to shore up the antipodean currency, particularly if the US Dollar comes under renewed pressure.

While the RBA mentioned conditions in the housing market were variable around the country - and prices were falling in some markets - problems still existed despite regulatory efforts to rein in rising levels of household debt. The central bank is anxious that incomes are rising at a much slower pace than the increase in household debt.

Meanwhile, the outlook for consumer spending remains clouded. However, 69% of experts in the finder.com.au Reserve Bank Survey expect three or fewer rate hikes over the next two years.

On the other side of the ledger, wage and price growth is low; household debt is a concern; home price growth is slowing; and the Aussie dollar remains firm. Some pick-up in non-mining business investment is expected. Business conditions have improved and capacity utilization has increased. But Dr Lowe noted that "a factor working in the other direction is increased competition from new entrants in the retail industry".

The BOE's quarterly inflation report will also be released on Thursday, however, the consensus estimate is for little change to forecasts.

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