Instant view: Australia’s RBA holds rates, alters tone on A$

By: | Updated: August 4, 2015 11:22 AM

Reserve Bank of Australia (RBA) held its cash rate steady at 2.0 percent on Tuesday in a widely expected decision, though it surprised some by toning down calls for a further fall in the Australian dollar.

Australia’s central bank held its cash rate steady at 2.0 percent on Tuesday in a widely expected decision, though it surprised some by toning down calls for a further fall in the local dollar.

The currency hopped up half a U.S. cent after the Reserve Bank of Australia (RBA) said only that the Aussie was adjusting to significant declines in key commodity prices. Previously it had stated that further falls seemed both likely and necessary.

A Reuters poll of 21 analysts had found all but one expected rates to stay unchanged this week, while markets had priced in almost no chance of a move.

KEY POINTS:
* RBA holds its cash rate at 2 pct following cuts in May and February
* RBA says information on economic and financial conditions will inform the Board’s assessment of the outlook and hence whether the current stance of policy will most effectively foster sustainable growth and inflation
* Monetary policy needs to be accommodative. Low interest rates are acting to support borrowing and spending
* The Australian dollar is adjusting to the significant declines in key commodity prices
* Economy growing somewhat below longer-term averages, while employment has been somewhat stronger and unemployment steady

What do analysts say?

*TOM KENNEDY, ECONOMIST, JPMORGAN
“The main change is on the currency front where they’ve significantly altered the language. In the past couple of meetings they’ve said that depreciation is both likely and necessary given the significant decline in commodity prices, now they’re saying the exchange rate is adjusting to significant declines in commodity prices, so they’re saying the adjustment that you’d expect is taking place.”
“They’ve backed away from providing any sort of guidance or expectation about where they think it’s going.
“It’s fairly neutral and quite short and they don’t elaborate on any one particular theme. It’s a bit of a holder until we see the statement on monetary policy on Friday with its forecasts on growth and inflation.”

* SU-LIN ONG, SENIOR ECONOMIST, RBC CAPITAL MARKETS
“The fact that they have toned down the reference to the weaker currency suggests that the easing bias, which was already pretty modest, is very mild. Part of the rationale around having an easing bias and threatening to cut is to get your currency lower.
I still think there is a good chance they take rates lower but they will sit on the sidelines. Some of the factors, lower terms of trade and weak national income, will ultimately see them move but not until late this year and again mid-2016.”

* MICHAEL BLYTHE, CHIEF ECONOMIST, COMMONWEALTH BANK OF AUSTRALIA:
“The RBA seems to be pretty happy with the mix of monetary conditions they have right now and it also seems to be a little bit more positive on the labour market, but Glenn Stevens has been foreshadowing that in some of his recent commentary.
“We’ll need to wait till Friday to see if they’ve adjusted their forecasts if at all. Certainly there is nothing in today’s statement that suggests they’ve shifted their thinking. We’re saying 2.0 percent is the bottom for the cash rate and we’ll probably be here for quite a while, certainly the rest of this year and into 2016.”

JASMIN ARGYROU, SENIOR INVESTMENT MANAGER, ABERDEEN ASSET MANAGEMENT:
“With the official cash rate on hold again today, the focus is on the degree of the easing bias in the RBA’s statement as an indication of what’s to come. Today’s announcement was more implicit than explicit and suggests the RBA will be on hold for the foreseeable future. Although economic data has stabilised, the economy is vulnerable while growth remains sub-par. In the recent past we’ve seen these types of “green shoots” turn brown quickly at even the smallest of negative shocks.”

MARKET REACTION:
The Australian dollar rose half a U.S. cent to $0.7344 after the policy announcement. Interbank futures dipped a little as the market lengthened the odds on another cut in interest rates, at least for the next few months.

BACKGROUND:
– A Reuters poll of 21 analysts had found all but one expected a steady outcome this week. Markets still imply around 21 bps of further easing priced in for this year. AU/INT
– Core inflation is well contained in the RBA’s target band of 2 to 3 pct, leading the bank to state that an easing is still on the table.
– The economy is struggling with a prolonged downturn in mining investment and a disappointing reluctance by other sectors to pick up the slack.
– Falling prices for major commodity exports have also hit company profits, national income and government tax revenues, eating into nominal GDP growth.
– Record low rates have fuelled a much-needed boom in home building but are also driving speculative increases in house prices, particularly in Sydney.

Get live Stock Prices from BSE and NSE and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Switch to Hindi Edition