The Reserve Bank of Australia kept the cash rate on hold at 2%, on par with expectations. The central bank’s statement was largely optimistic on the global and domestic economies’ outlook. The central bank seems relieved that the market volatility seen in early 2016 has eased and that the financial market confidence has rebounded, according to St.George Bank. This does not signify that everything is good, added St.George Bank.
Major jurisdictions’ policy settings are depicted as ‘remarkably accommodative’. QE in Europe, negative interest rates in Japan and a guarded approach from the US Fed leaves the Australian central bank thinking how the scenario of low interest rate will play out, noted St.George Bank.
RBA stated that the recent appreciation in AUD might complicate the ongoing process of adjustment in the economy. The central bank did not state that it anticipated the currency to depreciate. However, according to St.George Bank, the AUD is likely to struggle to appreciate again. This will depend mostly on the interest rate path the US takes and on prices of commodities.
At certain point, the US Fed is likely to hike its rates that will consequently exert certain downward pressure on the AUD, said St.George Bank. Additional increase in commodity prices will probably need solid global growth as compared to current expectations or a severe and unexpected disturbance to supplies, added St.George Bank.
RBA’s optimistic tone in its statement was also for the domestic economy. According to the central bank, there are reasonable outlook for the Australian economy to continue growing. Lower rates are underpinning demand and central bank’s worries regarding the quick acceleration of house prices appear to be waning after supervisory measures by APRA.
Australia’s inflation continues to be low and business borrowing has recovered. However, with the weakness in manufacturing sector and the drop in mining investment, the Australian economy is in reasonable shape, according to St.George Bank. If Australian economic activity slows considerably, the central bank might come in and lower the cash rate. The RBA is expected to keep rates unchanged throughout 2016, noted St.George Bank.
“We do not believe that the RBA would cut the cash rate simply to target the AUD but a rise in the AUD without a corresponding rise in commodity prices would give them pause for thought”, added St.George Bank.
