RBA policy – assessing the bias

Reserve Bank of Australia (RBA), today, decided to keep policy unchanged and keep interest rate at 2%. Since it was largely expected to stay put, Aussie didn’t gain much from the decision. Reserve bank of Australia (RBA) after few sharp reduction in rates has kept policy unchanged from mid of last year as outlook improved.

It is likely to keep exercising caution as Dollar weakness is failing to weaken currencies, even after policy easing.

Let’s look at the details of policy announcement to assess the bias of RBA.

Key highlights –

• RBA notes that global economy is growing but now at much slower pace than earlier noted. Acknowledged improvement in advanced economies and deteriorating conditions weakness in emerging market economies. RBA considered China to be growing moderately. (Neutral bias)
• RBA acknowledged recent rise in commodities prices but notes that it is much lower compared to years back, so terms of trade is weaker for Australia. (Mild dovish)
• Financial market volatility have improved, however uncertainty remains and monetary policy globally remains very accommodative. (Neutral)
• Despite weakness in mining investment, economy picked up along labour market in 2015 and improvement continues. (Hawkish)
• Inflation low and likely to remain so, labour cost subdued (Mild dovish).
• RBA seems to be less worried over the risks from rising house prices and assures of keeping policy accommodative (Neutral)
• RBA expressed worries over recent strength of Australian Dollar as it could derail rebalancing (Mild Dovish)
• RBA’s board judged that there are prospects to continued growth in the economy with inflation close to target (Hawkish).
• Outlook of inflation, may afford further easing if situation demands so. (Mild dovish)

With most bias pointing to a neutral tone, RBA is expected to leave rates unchanged going ahead at least till third quarter year, unless rapid deterioration of economic outlook takes place.

However, compared to previous statement, today’s can be called as further move towards Neutral.

Australian Dollar is trading at 0.759 against Dollar.