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Australia’s central bank stands pat, neutral tone lifts Aussie dollar

Australia’s central bank stands pat, neutral tone lifts Aussie dollar

SYDNEY: Australia’s central bank held its policy rate steady on Tuesday, refraining from delivering back-to-back easings and appeared to have lifted the bar for another rate cut in a move that saw the local dollar pop higher.

In a widely expected decision, the Reserve Bank of Australia (RBA) kept the cash rate at a record low 1.75 percent after its monthly review. All but one of 52 economists surveyed by Reuters had predicted such an outcome.

“The Board judged that holding the stance of policy unchanged at this meeting would be consistent with sustainable growth in the economy and inflation returning to target over time,” Governor Glenn Stevens wrote in a brief statement accompanying the decision.

The Australian dollar rose more than half a U.S. cent to hit a one-month high of $0.7432 as the neutral tone reinvigorated Aussie bulls.

Investors were also quick to trim the risk of a July cut with interbank futures implying a mere 14 percent chance, down from 25 percent earlier. The market is pricing in a two-in-three chance of a cut by October.

Along with other major central banks, the RBA is fighting off deflationary pressures but reasonably strong economic growth has allowed it the luxury to pause and see if prices will pick up. Indeed, the rate cut in May came exactly a year after it had last eased.

The absence of a clear guidance on future policy moves caught some analysts by surprise. Back in April when the RBA left rates unchanged, it said: “continued low inflation would provide scope for easier policy.”

“We had thought they would reveal some sort of easing bias today. They haven’t done that,” said Tom Kennedy, economist at JPMorgan.

A cut this month had been highly unlikely in any case after minutes of the May meeting indicated the central bank had considered keeping rates unchanged, suggesting last month’s unexpected easing was pre-emptive rather than an urgent response to low inflation.

Moreover, recent data showed the economy grew at its fastest pace in over three years last quarter.

Yet historically low inflation means the central bank has room to ease again if needed.

Government figures in April showed key measures of underlying inflation slowed to an annual rate of 1.6 percent in the first quarter, the lowest on record and well under the RBA’s long-term target band of 2 to 3 percent.

“The Reserve Bank is effectively in wait-and-see mode now,” said Craig James, chief economist at CommSec.

“Like everyone else, they are waiting for the next inflation figures to decide the next move in interest rates.”

The Bureau of Statistics releases second quarter consumer price data at the end of July, leaving the August policy meeting a ‘live’ one.

“Despite the lack of forward guidance in today’s statement, we continue to expect the Bank to ease further, given that core inflation is likely to remain below the RBA’s target band. We maintain our pick for the timing of the next cut as August,” said Phil Odonaghoe, economist at Deutsche Bank.

Copyright Reuters, 2016

Courtesy : BRecorder



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