RBA holds cash rate at all-time low

The Reserve Bank says it is willing to act if upcoming data indicates the need for policy adjustment.

All analysts surveyed by Bloomberg had tipped the RBA to stay put. Picture: Chris Pavlich.

The Reserve Bank has left rates on hold at their current all-time low, as it waits for a crucial update on inflation due out on July 27.

The central bank retained the cash rate at 1.75 per cent, a level first struck in May after a surprise 25 basis point reduction.

The result matched market expectations, with analysts tipping a cautious statement ahead of the release of June quarter consumer price data.

The prospect of the RBA reinserting an easing bias in its commentary had been the major talking point ahead of the meeting, and while the central bank did not explicitly declare such a bias, it significantly tweaked its language.

RBA Governor Glenn Stevens did, however, expand on his summary to say the Reserve Bank was willing to act if need be.

In the closely-watched summary of the decision Governor Glenn Stevens said the Reserve Bank was willing to move again if need be. It represented a shift in tone that would allow the RBA to lower rates next month if inflation numbers disappoint.

Last month there was no reference to the potential for an “adjustment”.

The Australian dollar fell on the news, sliding to US75.08c at 2.45pm (AEST), from US75.2c prior to the announcement.

It had initially risen to US75.4c on the ‘hold’ decision, but fell as traders noted the revised wording of its announcement included a clear openness for further cuts, if conditions warrant.

Ahead of the July board meeting all analysts surveyed by Bloomberg had tipped the RBA to stay put, while futures markets were pricing in just a 13 per cent chance of a rate reduction.

Investors had been eagerly awaiting the statement given it represented the first chance for Australia’s central bank to respond to both the uncertain Federal election result and the shock Brexit vote in Britain.

The RBA failed to address the election result, although it did weigh in on the Brexit news, showing little concern at this stage.

“Any effects of the referendum outcome on global economic activity remain to be seen and, outside the effects on the UK economy itself, may be hard to discern,” Mr Stevens said, adding most markets had since functioned “effectively”.

The central bank pasted its inflation commentary word-for-word from the prior month’s statement, clearly waiting for more information out of the June quarter release due later this month.

“Inflation has been quite low. Given very subdued growth in labour costs and very low cost pressures elsewhere in the world, this is expected to remain the case for some time,” Mr Stevens said.

Booming property markets in Sydney and Melbourne could force the Reserve Bank to hold off on further rate cuts until later in the year, although most analysts believe another weaker-than-expected inflation reading would force the RBA’s hands regardless of any further data out of the housing sector.

Last week, figures showed a slowdown in national house price growth, but prices have still gained over 11 per cent through the 2016 financial year in the nation’s two most populous cities.

Mr Stevens stuck with his comments on the housing sector from the month prior, noting house prices were rising but a strong supply of apartments could keep further moves in check.

The governor also talked up the economy’s adjustment out of the mining boom, but outlined concern around the local currency’s recent rise above US75c.

“Low interest rates have been supporting domestic demand and the lower exchange rate since 2013 is helping the traded sector,” he said.

“Financial institutions are in a position to lend and credit growth has been moderate.

“These factors are all assisting the economy to make the necessary economic adjustments, though an appreciating exchange rate could complicate this.”