Australian dollar slumps after Reserve Bank keeps official interest rate on hold at 4.75pc

AUSSIE dollar drops after Reserve Bank's fifth consecutive interest rate freeze as disappointed traders drop currency.

interest rates

THE dollar dropped more than half a US cent after the Reserve Bank decided to keep the cash rate at 4.75 per cent.

At 5pm (AEST) today, the dollar was trading at 106.89 US cents, down from 107.53 cents yesterday.

Since 7am (AEST) today, the local unit traded between 106.73 US cents and 107.49 cents.

The Reserve Bank of Australia's (RBA) interest rate decision was widely expected and is the fifth consecutive hold on the official interest rate.

Economists said the wording of the short statement that came with the decision was very similar to last month.

CMC Markets foreign exchange dealer Tim Waterer said traders wanted a more definitive statement from the central bank.

"The fact that they held rates steady was no great surprise," he said.

"There was really no change to the rhetoric from previous editions, which didn't really give a clue as to their intentions for July or August in terms of a likely hike or not.

"Naturally the path of least resistance was to the downside and that saw it fall below 107.00 US cents."

Today's RBA decision to keep rates on hold for a fifth straight meeting was widely expected.

But pundits say mortgagees should be under no illusions that as inflation risks mount rates will rise.

Experts are forecasting that the official interest rate will rise one percentage point to 5.75 per cent in the next 12 months - equivalent to an extra $200 in monthly repayments on the average $300,000 home loan - as the RBA tries to manage Australia's patchwork economy.

Weather impacts on rates

RBA governor Glenn Stevens said in a statement today floods and cyclones over summer had reduced output in some key sectors.

"Growth in employment has moderated over recent months and the unemployment rate has been little changed, near five per cent," Mr Stevens said.

"After the significant decline in 2009, growth in wages has returned to rates seen prior to the downturn.

"CPI inflation has risen over the past year, reflecting the effects of extreme weather and rises in utilities prices, with lower prices for traded goods providing some offset.

"The weather-affected prices should fall back later in the year, though substantial rises in utilities prices are still occurring.

"The Bank expects that, as the temporary price shocks dissipate over the coming quarters, CPI inflation will be close to target over the next 12 months."

He said the RBA "judged that the current mildly restrictive stance of monetary policy remained appropriate".

Rates heading up

But experts say rates are on the way up and soon, with strong business investment plans and record iron ore and coal prices supporting the bank's belief that tighter monetary policy is needed.

The timing of the next rate rise may become clearer on Thursday when "critical" labour force data released for May could force the RBA's hand at its next meting.

HSBC chief economist Paul Bloxham, who worked at the RBA for 12 years, is forecasting a rise next month or in August.

He says Thursday's official job numbers were a critical piece of the puzzle.

With the nation's unemployment rate already below 5 per cent - a level deemed consistent with full employment - Mr Bloxham said further labour market tightening would help move the RBA off the sidelines.

"Guessing the timing is the hard part," Mr Bloxham said.

"The big picture story of a massive mining boom, tightening labour market, rising wages and higher inflation remains very much intact.

"As a result, rates will need to rise multiple times over the next year, though we expect the next move is still a month or two away."

All 11 economists surveyed earlier by AAP forecast the central bank would leave the overnight cash rate on hold.

Sydney Macquarie Group senior economist Benjamin Dinte said the RBA's statement was slightly more dovish than in May, when the central bank increased their inflationary forecasts and raised expectations of cash rate hikes.

"There doesn't appear to be any significant change in the RBA's outlook for the economy or for interest rates,'' Mr Dinte said.