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Category: Money and Monetary Policy / Economic Trends

RBA heads south but interest rates unlikely to follow

Tuesday, 5 Apr 2016 08:00:12 | Rebecca Hyam

The Australian dollar has risen 7 per cent against the greenback in a month. (ABC News)

The Reserve Bank is not expected to make any change to the official cash rate at today's board meeting, but economists say concerns about the rising Australian dollar will be front and centre.

The bank's board will be meeting in Hobart for the first time, as one of two meetings a year it typically holds outside its Sydney headquarters.

However, while the bank is heading south, a survey of 26 economists by Bloomberg shows none of them is tipping the cash rate to follow it down from its current, historically low level of 2 per cent.

The last cut by the RBA was in May 2015, when it reduced the cash rate by 25 basis points.

A speech last month by Reserve Bank governor Glenn Stevens offered a fairly upbeat assessment of the domestic economy, prompting analysts to speculate that interest rates would be left on hold for the time being.

However, economists say the commentary accompanying today's monetary policy statement will be noteworthy, with the currency likely to take on greater significance.

The Australian dollar rallied almost 7 per cent against the US currency in March.

JP Morgan's chief economist in Australia, Sally Auld, said that steady rebound will be a concern for the RBA but, at the current rate of around 76 US cents, board members would not be panicking just yet.

"They are a central bank with a disposition, where they don't tend to knee-jerk react to developments, so they might give that story a little bit longer to play out," she said.

Ms Auld also said the RBA would want to see the inflation data for the first quarter, due out in three weeks, before making any change to the cash rate.

"Those numbers only come once a quarter, and they're clearly very important for the policy making process," she added.

"And so, it would be quite unusual to see the RBA pre-empt any particular outcome on those numbers by moving rates a couple of weeks before the inflation data are released."

JP Morgan is predicting interest rates will remain on hold for the rest of the year, unless there is an ongoing and substantial increase in the value of the Australian dollar, which subsequently dampens activity in key areas of the domestic economy.

AMP Capital Markets chief economist Shane Oliver is tipping another rate cut in the months ahead.

In an economic note, Mr Oliver said a reduction in the cash rate would be justified to offset the impact of weaker mining investment, the slowing housing market, and any possible further out of cycle bank interest rate rises.

He also believes the recent appreciation in the local currency will capture the attention of board members at the April meeting.

"Most interest will focus on whether it responds to the 7 per cent gain in the value of the Australian dollar since its last board meeting," Mr Oliver's note stated.

AustraliaPlus


 

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