Cash rate to remain on hold, for now

The Reserve Bank of Australia (RBA) has left the cash rate unchanged at 2%, saying the nation’s moderate economic growth and inflation levels in line with the central bank’s targets made accommodative monetary policy the best course of action.

Australia posted its slowest quarterly growth in four years in the second quarter, as a fading resources-investment boom and falling export revenue continued to put a brake on the economy.

Lawless said the changes in Sydney’s market give the RBA added flexibility for their decisions in coming months; however, other economic factors point to rates staying around the 2% mark.

The weaker Aussie “is loosening financial conditions and supporting growth”, Paul Bloxham, chief Australia economist at HSBC Holdings, who previously worked at the central bank, said before the decision was announced.

Westpac’s Speizer said the delays to United States interest rate hikes and the improving dairy outlook prompted him to revise his short-term outlook for the kiwi dollar, which he now sees rising over the next few weeks, before reverting to a downward trend once the Fed starts tightening monetary policy.

In the past week, ANZ forecast that two rate cuts would be delivered in the months ahead, though the bank did not forecast a cut in October.

The Reserve Bank noted that moderate expansion in the domestic economy continues, if somewhat below longer-term averages.

The Australian dollar rose to 2-week highs of 0.7121 against the USA dollar and 85.78 against the yen, from early lows of 0.7066 and 85.09, respectively.

Financial, commodity and currency markets have all roiled over the past fortnight because of continuing doubts over interest rate settings in the US. According to the Business Spectator this morning, the market was pricing in a mere 7 per cent chance of an interest rate cut today, so there certainly weren’t any surprises.

Despite the signs of improvements, many analysts believe the Reserve Bank is not yet finished cutting official rates, arguing that more stimulus will be needed to bring the jobless rate down.