The statement following interest-rate session by the Reserve Bank of Australia didn't too much in way of surprises.

  • It was prudent to maintain the interest rate at 4.75%.
  • The global economic outlook remains less clear that earlier in the year.
  • A key question will be whether softer global and domestic growth will help to contain inflation.
  • Growth will continue on the back of terms trade, mining sector and mining investment as well as well as solid growth from China.
  • The RBA remains concerned about the underlying rate of inflation.

 

The Reserve Bank of Australia (RBA) expressed concern about recent financial turmoil as well as the economic growth prospects of Europe and the US, however it could not conclude effects just yet on the Australian economy. The mining sector is showing strong growth and investment, and terms of trade remains at high levels as well. However in other sectors, cautious behavior by households and a high level of the exchange rate are having a noticeable dampening effect. Overall growth in the near-term look somewhat weaker than was expected a few months ago the bank concluded.

width=302On the inflation front the RBA expects the annual CPI to start declining towards the end of the year however it continues to be concerned about underlying inflation which has been increasing this year. While they have, to date, remain consistent with the 2 to 3% target year and basis, the board remains concerned about the medium-term outlook for inflation. A key question will be the extent to which softer: domestic growth will work, in due course, to contain inflation.

Current interest rates are exerting a degree of restraint, as credit growth has declined and housing prices have softened. Overall the RBA felt that financial conditions are tighter than normal and that it would be prudent to maintain the current stance of monetary policy.

RBA On Hold For A Whole, But Next Move May Still be Up

The take away here is that the RBA looks to be set to hold rates at the current levels for some time. The RBA sees the central scenario is for inflation to rise above target, but with the uncertain outlook for the global economy, combined with ongoing softness and domestic activity, that means the RBA has time on its side.

It can retain its policy until mid next year when the economy is expected to grow above trend again. However that outlook for Australia's major trading partners means that the next move is more likely to be up rather than down. Currently futures markets are betting on 130 basis points easing over the next 12 months, but the strong mining sector and inflows for investment should keep the RBA from lifting its foot of the breaks (interest rates at 4.75%). The RBA is therefore in a holding pattern. That should mean that the Aussie does not gain much of an advantage from a widening interest-rate perspective.

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Nick Nasad
Chief Market Analyst
FXTimes